Chapter 4: Q10-2BP (page 321)

Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is
a.7 percent.
b.10 percent.
c.13 percent.

Short Answer

Expert verified

a. $1,116.32

b. $818.16

c. $633.4

Step by step solution

Definition of Bonds

Bonds are defined as securities issued by a business that requires regular interest payment to its holder. These are debt securities and offer regular income to its holder.

Present value of bond under first case – 7% yield to maturity

$\begin{array}{rcl} P r e s e n t v a l u e o f b o n d & = & [C o u p o n A m o u n t \times \frac{1 - \frac{1}{{(1 + Y i e l d r a t e)}^{N u m b e r o f y e a r s}}}{Y i e l d r a t e}] + [A m o u n t \times \frac{1}{{(1 + Y i e l d r a t e)}^{N u m b e r o f y e a r s}}] \\ = & [$ 80 \times \frac{1 - \frac{1}{{(1 + 0.07)}^{25}}}{0.07}] + [$ 1, 000 \times \frac{1}{{(1 + 0.07)}^{25}}] \\ = & $ 932.32 + $ 184 \\ = & $ 1, 116.32 \end{array}$

Present value of bond under the second case – 10% yield to maturity

$\begin{array}{rcl} P r e s e n t v a l u e o f b o n d & = & [Coupon Amount \times \frac{1 - \frac{1}{{(1 + Yield rate)}^{Number of years}}}{Yield rate}] + [Amount \times \frac{1}{{(1 + Yield rate)}^{Number of years}}] \\ = & [$ 80 \times \frac{1 - \frac{1}{{(1 + 0.01)}^{25}}}{0.01}] + [$ 1, 000 \times \frac{1}{{(1 + 0.01)}^{25}}] \\ = & $ 726.16 + $ 92 \\ = & $ 818.16 \end{array}$

Present value of bond under the third case – 13% yield to maturity

$\begin{array}{rcl} P r e s e n t v a l u e o f b o n d & = & [Coupon Amount \times \frac{1 - \frac{1}{{(1 + Yield rate)}^{Number of years}}}{Yield rate}] + [Amount \times \frac{1}{{(1 + Yield rate)}^{Number of years}}] \\ = & [$ 80 \times \frac{1 - \frac{1}{{(1 + 0.13)}^{25}}}{0.13}] + [$ 1, 000 \times \frac{1}{{(1 + 0.13)}^{25}}] \\ = & $ 586.4 + $ 47 \\ = & $ 633.4 \end{array}$

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Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is
a.7 percent.
b.10 percent.
c.13 percent.

Short Answer

Step by step solution

Definition of Bonds

Present value of bond under first case – 7% yield to maturity

Present value of bond under the second case – 10% yield to maturity

Present value of bond under the third case – 13% yield to maturity

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Most popular questions from this chapter

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Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity isa.7 percent.b.10 percent.c.13 percent.

Short Answer

Step by step solution

Definition of Bonds

Present value of bond under first case – 7% yield to maturity

Present value of bond under the second case – 10% yield to maturity

Present value of bond under the third case – 13% yield to maturity

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Strategic Direction

Human Resources

Nature of Business

Intermediate Accounting

Corporate Finance

Business Case Studies

Study anywhere. Anytime. Across all devices.

Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is
a.7 percent.
b.10 percent.
c.13 percent.