Question

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 7 percent annual interest and has 16 years remaining to maturity. The current yield to maturity on similar bonds is 11 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. What is the current price of the bonds? (Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.) Answer is complete but not entirely correct. Current price of the bond 460.89 X b. By what percent will the price of the bonds increase between now and maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Answer is complete but not entirely correct. Price increases by $ 117.00 % |

Answer 1

6 $ 1,000 7% $ 70 16 | A B A Par value (FV) pla B Coupon rate C| Number of compounding periods per year D = AxB/C Interest per period (PMT) Number of years to maturity Number of compounding periods till F = CxE maturity (NPER) Market rate of return/Required rate of Greturn Market rate of return/Required rate of G/C return per period (RATE) 11 16 11% 11% PV(RATE,NPER, PMT,FV)*-1 Bond price Bond price $ 704.83 =PV(11% 16,70,1000)*-1 Price increases by 41.88% = (1000-704.83)/704.83

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