Question

This problem has been solved!See the answerMidland Oil has $1,000 par value bonds outstanding at 13 percent interest. The bonds will mature in 20 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 Pricea. 16 percent $b. 12 percent $c. 11 percent $

Answer 1

The current price of a bond is calculated based on the present value of its future cash flows, which include annual interest payments and the principal repaid at maturity. The price is determined using the yield to maturity as the discount rate; if the yield to maturity increases, the bond price decreases and vice versa.

Step-by-step explanation:

To calculate the current price of the bonds given the differing yields to maturity, we can use the present value formula for bonds. The bond pays annual interest, which is a series of payments, plus the final repayment of the principal (the par value) at maturity.

For each case, the present value of the interest payments (annuity) and the present value of the par value repaid at maturity must be calculated separately using the present value formulas and then summed up to determine the total present value of the bond (the bond’s price).

For instance, with a discount rate (yield to maturity) of 12%, we can see that a future payment of $1,080 should not cost more than $964 today, as $964 invested at 12% would grow to $1,080 in one year. Now think about a simple two-year bond. It has an interest of 8% and pays $240 annually with a principal repayment in the second year. If the discount rate is 8%, the bond's present value equals the face value, but if the discount rate increases to 11%, the present value of the bond decreases because future cash flows are discounted at a