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Chapter 4: 5BP (page 321)

Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 15 percent annual interest. The current yield to maturity on such bonds in the market is 17 percent. Compute the price of the bonds for these maturity dates:

a. 30 years.

b. 20 years.

c. 4 years.

Short Answer

Expert verified
  1. Bond price for 30 years is $883.50
  2. Bond price for 20 years is $887.48
  3. Bond price for 4 year is $945.10

Step by step solution

01

Computing annual coupon rate

Annualcoupon=Bondoutstanding×Annualinterest=$1,000×15%=$150

02

Step 2:a.Computing the price of the bonds for 30 years-

  • Par value of bond (P) is $1,000.
  • Yield to maturity (r) is 17%.
  • Years to maturity (n) is 30.

Bondprice=Coupon×[1-11+rn]r+P(1+r)n=$150×[1-11+0.1730]0.17+$1000(1+0.17)30=$150×5.83+9=$883.50

03

Step 3:b.Computing the price of the bonds for 20 years-

  • Par value of bond (P) is $1,000.
  • Yield to maturity (r) is 17%.
  • Years to maturity (n) is 20.

Bondprice=Coupon×[1-11+rn]r+P(1+r)n=$150×[1-11+0.170020]0.1700+$1000(1+0.1700)20=$150×5.638+43.28=$887.48

04

c.Computing the price of the bonds for 4 years-

  • Par value of bond (P) is $1,000.
  • Yield to maturity (r) is 17%.
  • Years to maturity (n) is 4.

Bondprice=Coupon×1-11+rnr×P1+rn=$150×1-11+0.1740.17×$10001+0.174=$150×2.743+533.65=$945.10

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Most popular questions from this chapter

Question:Surgical Supplies Corporation paid a dividend of $1.12 per share over the last 12 months. The dividend is expected to grow at a rate of 2.5 percent over the next three years (supernormal growth). It will then grow at a normal, constant rate of 7 percent for the foreseeable future. The required rate of return is 12 percent (this will also serve as the discount rate).

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