Chapter 4: Q6BP (page 321)

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 12 percent. Compute the price of the bonds for these maturity dates:
a. 30 years.
b. 15 years.
c. 1 year.

Short Answer

Expert verified

Bond price for 30 years is $758.78
Bond price for 15 years is $795.60
Bond price for 1 year is $973.22

Step by step solution

Computing the coupon.

$\begin{array}{rcl} A n n u a l C o u p o n & = & P a r V a l u e \times C o u p o n R a t e \\ = & $ 1, 000 \times 9 % \\ = & $ 90 \end{array}$

Computing the price of the bonds for 30 years.

Par value of bond (P) is $1,000.
Yield to maturity (r) is 12%.
Years to maturity (n) is 30.
$\begin{array}{rcl} B o n d P r i c e & = & C o u p o n \times \frac{[1 - \frac{1}{{(1 + r)}^{n}}]}{r} + \frac{P}{{(1 + r)}^{n}} \\ = & $ 90 \times \frac{[1 - \frac{1}{{(1 + 0.12)}^{30}}]}{0.12} + \frac{$ 1, 000}{{(1 + 0.12)}^{30}} \\ = & $ 90 \times 8.06 + 33.38 \\ = & $ 758.78 \end{array}$

Computing the price of the bonds for 15 years.

Par value of bond (P) is $1,000.
Yield to maturity (r) is 12%.
Years to maturity (n) is 15.
$BondPrice = Coupon \times \frac{[1 - \frac{1}{{(1 + r)}^{n}}]}{r} + \frac{P}{{(1 + r)}^{n}} = $ 90 \times \frac{[1 - \frac{1}{{(1 + 0.12)}^{15}}]}{0.12} + \frac{$ 1, 000}{{(1 + 0.12)}^{15}} = $ 90 \times 6.81 + $ 182.70 = $ 795.60$

Computing the price of the bonds for 1 years.

Par value of bond (P) is $1,000.
Yield to maturity (r) is 14%.
Years to maturity (n) is 18.

$B o n d P r i c e = C o u p o n \times \frac{[1 - \frac{1}{{(1 + r)}^{n}}]}{r} + \frac{P}{{(1 + r)}^{n}} = $ 90 \times \frac{[1 - \frac{1}{{(1 + 0.12)}^{1}}]}{0.12} + \frac{$ 1, 000}{{(1 + 0.1200)}^{1}} = $ 90 \times 0.8929 + 892.86 = $ 973.22$

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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 12 percent. Compute the price of the bonds for these maturity dates:
a. 30 years.
b. 15 years.
c. 1 year.

Short Answer

Step by step solution

Computing the coupon.

Computing the price of the bonds for 30 years.

Computing the price of the bonds for 15 years.

Computing the price of the bonds for 1 years.

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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 12 percent. Compute the price of the bonds for these maturity dates:a. 30 years.b. 15 years.c. 1 year.

Short Answer

Step by step solution

Computing the coupon.

Computing the price of the bonds for 30 years.

Computing the price of the bonds for 15 years.

Computing the price of the bonds for 1 years.

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Business Studies Textbooks

Operational Management

Financial Performance

Corporate Finance

Strategic Analysis

Managerial Economics

Intermediate Accounting

Study anywhere. Anytime. Across all devices.

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 12 percent. Compute the price of the bonds for these maturity dates:
a. 30 years.
b. 15 years.
c. 1 year.