Question

Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 13 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Compute the price of the bonds for these maturity dates: (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.)
  

Bond Price a. 40 years b. 25 years c. 2 year

Answer 1

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =40

Bond Price =∑ [(9*1000/100)/(1 + 13/100)^k]     +   1000/(1 + 13/100)^40

k=1

Bond Price = 694.62

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =25

Bond Price =∑ [(9*1000/100)/(1 + 13/100)^k]     +   1000/(1 + 13/100)^25

k=1

Bond Price = 706.8

c

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =2

Bond Price =∑ [(9*1000/100)/(1 + 13/100)^k]     +   1000/(1 + 13/100)^2

k=1

Bond Price = 933.28