Question

Katie Pairy Fruits Inc. has a $2,500, 17-year bond outstanding with a nominal yield of 18 percent (coupon equals 18% × $2,500 = $450 per year). Assume that the current market required interest rate on similar bonds is now only 12 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Answer 1

Market value of Katie Pairy Fruits bonds: $3,952.40

Step-by-step explanation:

To know the current market value of the bond we will calcualte the present value of the coupon payment and the present value of the maturity:

The coupon values will be done using ordinary annuity:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

Coupon payment: $450

time 17 years

rate 0.12 (we use market rate)

`450 * (1-(1+0.12)^(-17) )/(0.12) = PV\\`

PV $3,588.29

and the maturirty with the present vlaue of a lump sum

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $2,500

time 17 years

rate 0.12 (market rate)

`(2500)/((1 + 0.12)^(17) ) = PV`

PV $364.1109

PV coupon $3,588.2938

PV maturity $364.1109

Total $3,952.4046