Question

Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 10 percent annual interest. The current yield to maturity on such bonds in the market is 11 percent. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.Compute the price of the bonds for these maturity dates: (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.) Bond Price a. 40 years $ b. 17 years $ c. 8 years $

Answer 1

Answer:

a) 40 yrs Price=$910.49 b) 17 yrs Price=$924.51 c) 8 yrs Price=$948.54

Explanation:

Hi, well, what we need to do is to use the following data and formula in order to find the ´price of each bond, just by changing the maturity time for each , option (40 years, 17 years, and 8 years). Let's illustrate with the first price, when its maturity is 40 years.

$Price=\frac{Coupon((1+YTM)^{n-1}-1 )}{YTM(1+YTM)^{n-1} } +\frac{(Face Value+Coupon)}{(1+YTM)^{n} }$

$Price=\frac{100((1+0.11)^{39}-1 )}{0.11(1+0.11)^{39} } +\frac{(1000+100)}{(1+0.11)^{40} }=910.49$

That was a) Price=$910.49

$Price=\frac{100((1+0.11)^{16}-1 )}{0.11(1+0.11)^{16} } +\frac{(1000+100)}{(1+0.11)^{17} }=924.51$

That was b) Price=$924.51

$Price=\frac{100((1+0.11)^{7}-1 )}{0.11(1+0.11)^{7} } +\frac{(1000+100)}{(1+0.11)^{8} }=948.54$

Finally, that was c) Price=$948.54

Best of luck.