Final answer:
The price of Panhandle Ventures' bonds should be calculated by finding the present discounted value of the bond's future cash flows, considering the bond has a higher coupon rate than the current market rate. This involves determining the present value of the bond's $80 annual interest payments and the $1,000 par value, then adjusting the price based on the market interest rate, which is currently 5%.
Step-by-step explanation:
Calculating the Price of Panhandle Ventures' Bonds
To determine at what price Panhandle Ventures' bonds should sell, we need to calculate the present value of the bond's future cash flows given the current market interest rate. The bond has a par value of $1,000, an annual coupon rate of 8%, and a maturity of 30 years. Since the market interest rate is 5%, the bond's price will be higher than the par value because its coupon rate is higher than the current market rate, indicating the bond is more attractive to investors.
The present value of the bond is calculated by discounting the annual interest payments and the face value at the market interest rate. For the annual interest payments, we calculate the present value of an annuity, and for the face value, we calculate the present value of a lump sum to be received in 30 years. The formulas for these calculations are based on the standard present value formulas in financial mathematics.
Using the given example of a simple two-year bond, if we have an 8% coupon bond and the market interest rates move to 5%, the present value of the bond would increase since it is now a more attractive investment option compared to new bonds that would be issued at the lower market rate. On the other hand, if market interest rates increase to 12%, the price of the bond would decrease to make it competitive with newer bonds issuing higher coupon rates.