Question: Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity:

a. 7 percent
b. 10 percent
c. 13 percent

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Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity:

a. 7 percent
b. 10 percent
c. 13 percent

Solution:
To calculate the price of the bond we need to calculate/read from tables the values of
PVIF = Present Value Interest Factor
PVIFA = Present Value Interest Factor for an Annuity
Price of bond = PVIF * Redemption value + PVIFA * interest payment per period

PVIFA( n, r% ) = =[1-1/(1+r%)^n]/r%
PVIF( n, r%) = =1/(1+r%)^n

a. 7%

Price of bond
Coupon rate = 8.000%
Face value = $1,000
Interest payment per year = $80.00 =8.% x 1000

Frequency = S Semi ...

Solution Summary

This solution illustrates how to calculate bond price for different yields to maturity. All calculations are included.

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