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 5 percent annual interest and has 14 years remaining to maturity. The current yield to maturity on similar bonds is 14 percent. Use Appendix Band 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.) Current price of the bond 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.) Price Increases by

Answer 1

Given for a bond,

Face value = $1000

coupon rate = 5%

so coupon = 5% of 1000 = $50

years to maturity = 14 years

YTM = 14%

a). so calculating price of the bind using financial calculator

FV = 1000

pmt = 50

N = 14

I/Y = 14

compute for Pv, we get PV = $459.81

b). At maturity, price of the bond equal Face value. So here at maturity price of the bond will be $1000

percentage increase in the price = (final price-initial price)/initial price = (1000-459.81)/459.81 = 117.50%

So price of the bond increase by 117.50% between now and maturity.