Question

Midland Oil has $1,000 par value bonds outstanding at 20 percent interest. The bonds will mature in 15 years. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Compute the current price of the bonds if the present yield to maturity is:
A. 15 percent :
B. 10 percent :
C. 14 percent :

Answer 1

The current price of Midland Oil's bonds depends on the yield to maturity, with different prices expected when the YTM is 15%, 10%, and 14%. The bond pricing would involve discounting future cash flows at the given YTMs to their present values using the present value formula or a financial calculator.

Step-by-step explanation:

To calculate the current price of Midland Oil's bonds with a $1,000 par value and a 20 percent coupon rate maturing in 15 years, we need to consider the present yield to maturity (YTM). We'll go through the calculations for when the YTM is 15 percent, 10 percent, and 14 percent:

• Case A: When the YTM is 15 percent, the bond's price is lower since the market is demanding a higher return compared to the bond's coupon rate.
• Case B: With a 10 percent YTM, the bond's price would be higher because the coupon rate is greater than the market rate.
• Case C: If the YTM is 14 percent, the bond price will also be below the par value as the market interest rate is less than the bond's coupon rate, but closer to par than in Case A.

The bond's price can be calculated using the present value formula for each coupon and the final principal payment, or using a financial calculator by inputting the appropriate cash flows and discount rates.