Question

Lance whittingham iv specializes in buying deep discount bonds. these represent bonds that are trading at well below par value. he has his eye on a bond issued by the leisure time corporation. the $1,000 par value bond with semiannual payments has 5 percent annual interest and has 20 years remaining to maturity. the current yield to maturity on similar bonds is 14 percent. (use a financial calculator to arrive at the answers. do not round intermediate calculations. round the final answers to 2 decimal places.) a. what is the current price of the bonds? current price $ b. by what percent will the price of the bonds increase between now and maturity? price increases by % c. what is the annual compound rate of growth in the value of the bonds? annual compound rate %

Answer 1

The current price of the bond can be calculated using a financial calculator with inputs such as face value, coupon rate, yield to maturity, and number of periods.

Step-by-step explanation:

To determine the current price of the Leisure Time Corporation bond, we will use the following inputs in a financial calculator:

Face value (FV): $1,000

Coupon rate: 5% (which means annual payments of $50, since it's 5% of $1,000)

Market interest rate (YTM): 14% (but since payments are semiannual, we'll use 7% per period)

Number of periods (N): 40 (20 years of semiannual payments)

By inputting these into the calculator, we'll find the present value of the bond, which is its current price.

The price increase in the bond until maturity can be found by noting that the bond will return to the face value at maturity. The percentage increase will be the difference between the face value and the current price, divided by the current price.

The annual compound rate of growth can be computed using the compound growth formula, where the initial value is the current price of the bond, the final value is the par value, and the time is 20 years.