Question

The Lone Star Company has $1,000 par value bonds outstanding at 9 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. (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.)
Bond Price
a. 6 percent $
b. 8 percent $
c. 13 percent $

Answer 1

To calculate the bond's price when the interest rate is less than the market interest rate, use the present value formula. Given the expected payments from the bond one year from now, we can determine the maximum price to pay. In this case, the maximum price is $964.

To calculate the bond's price when its interest rate is less than the market interest rate, we need to use the present value formula. In this case, the expected payments from the bond one year from now are $1,080, which includes both the final interest payment and the repayment of the original $1,000. Given that interest rates are now 12%, we can calculate the maximum price we would pay for the bond. If we invest $964 in an alternative investment at 12% interest, we would receive $1,080 a year from now. Therefore, we would not pay more than $964 for the original $1,000 bond.