Question

Exodus Limousine Company has $1,000 par value bonds outstanding at 15 percent interest. The bonds will mature in 30 years. Compute the current price of the bonds if the percent yield to maturity is:

a. 4 percent

b. 8 percent

Calculate the final answer up to two decimal places. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Assume interest is paid annually.

Answer 1

if YTM at 4% price : $2,902.1237

if YTM at 8% price : $1,788.0448

The bonds are above face value asthey offer a higher coupon payment than the market yield therefore the bond holders are willing to pay above theri face value

Step-by-step explanation:

the market price of the bond will be the present value of coupo payment and maturity:

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

C 150.000

time 30

rate 0.04

`150 * (1-(1+0.04)^(-30) )/(0.04) = PV\\`

PV $2,593.8050

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

Maturity 1,000.00

time 30.00

rate 0.04

`(1000)/((1 + 0.04)^(30) ) = PV`

PV 308.32

PV c $2,593.8050

PV m $308.3187

Total $2,902.1237

No we repeat the process with the yield at 8%

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

C 150.000

time 30

rate 0.08

`150 * (1-(1+0.08)^(-30) )/(0.08) = PV\\`

PV $1,688.6675

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

Maturity 1,000.00

time 30.00

rate 0.08

`(1000)/((1 + 0.08)^(30) ) = PV`

PV 99.38

PV c $1,688.6675

PV m $99.3773

Total $1,788.0448