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 10 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.) 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 1

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solution : Lance Whittingham Ty - leisure Time Corporation @ current price of bonds present value of Intrest payments PVA = A x PVIFA (n=16,1 =107.) Appendix D PV = $70 X 7.824 = $ 547168 present value of principal payment at maturity PV = FV * PV IF (n =16, i = 10%) 110%) Appendix B PV = $1000 x .218 - $218 Bond price = $547.684 $218 - $765.68 6 percentage increase at maturity percentage increase in price = maturity value - current value current value - $1000 - $705.68 $765.68 $234.32 $765.65 = 30.60%