Question

Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,200. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 11 percent annual interest payable semiannually, and has 20 years remaining until maturity. The current yield to maturity on similar bonds is 10 percent a. Compute the new price of the bond. (Use a Financial calculator to arrive at the answers. Do not round Intermediate calculations. Round the final answer to 2 decimal places.) New price of the bond b. Do you think the bond is overpriced?

Answer 1

Price = PV of CFs from it.

Period	CF	PVf @5%	Disc CF
1	$      55.00	0.9524	$       52.38
2	$      55.00	0.9070	$       49.89
3	$      55.00	0.8638	$       47.51
4	$      55.00	0.8227	$       45.25
5	$      55.00	0.7835	$       43.09
6	$      55.00	0.7462	$       41.04
7	$      55.00	0.7107	$       39.09
8	$      55.00	0.6768	$       37.23
9	$      55.00	0.6446	$       35.45
10	$      55.00	0.6139	$       33.77
11	$      55.00	0.5847	$       32.16
12	$      55.00	0.5568	$       30.63
13	$      55.00	0.5303	$       29.17
14	$      55.00	0.5051	$       27.78
15	$      55.00	0.4810	$       26.46
16	$      55.00	0.4581	$       25.20
17	$      55.00	0.4363	$       24.00
18	$      55.00	0.4155	$       22.85
19	$      55.00	0.3957	$       21.77
20	$      55.00	0.3769	$       20.73
21	$      55.00	0.3589	$       19.74
22	$      55.00	0.3418	$       18.80
23	$      55.00	0.3256	$       17.91
24	$      55.00	0.3101	$       17.05
25	$      55.00	0.2953	$       16.24
26	$      55.00	0.2812	$       15.47
27	$      55.00	0.2678	$       14.73
28	$      55.00	0.2551	$       14.03
29	$      55.00	0.2429	$       13.36
30	$      55.00	0.2314	$       12.73
31	$      55.00	0.2204	$       12.12
32	$      55.00	0.2099	$       11.54
33	$      55.00	0.1999	$       10.99
34	$      55.00	0.1904	$       10.47
35	$      55.00	0.1813	$         9.97
36	$      55.00	0.1727	$         9.50
37	$      55.00	0.1644	$         9.04
38	$      55.00	0.1566	$         8.61
39	$      55.00	0.1491	$         8.20
40	$      55.00	0.1420	$         7.81
40	$ 1,000.00	0.1420	$     142.05
Price of Bond			$ 1,085.80

Bond is Over Priced.