Key Answer

Assignment Results

Lycan, Inc., has 7.5 percent coupon bonds on the market that have 8 years left to maturity. The bonds make annual payments. Required: If the YTM on these bonds is 9.5 percent, what is the current bond price? (Do not include the dollar sign ($). Round your answer to 2 decimal places (e.g., 32.16).) Current bond price

Explanation:

$

891.33 ± 5%

The price of any bond is the PV of the interest payments, plus the PV of the par value. Notice this problem assumes an annual coupon. The price of the bond will be: P = $75({1 – [1/(1 + 0.095)]8} / 0.095) + $1,000[1 / (1 + 0.095)8] P = $891.33 We would like to introduce shorthand notation here. Rather than write (or type, as the case may be) the entire equation for the PV of a lump sum, or the PVA equation, it is common to abbreviate the equations as: PVIF

R,t

= 1 / (1 + R)

t

which stands for Present Value Interest Factor PVIFA

R,t

= ({1 – [1/(1 + R)] } / R)

t

which stands for Present Value Interest Factor of an Annuity These abbreviations are shorthand notation for the equations in which the interest rate and the number of periods are substituted into the equation and solved. We will use this shorthand notation in the remainder of the solutions key. The bond price equation for this problem would be: P = $75(PVIFA9.5%,8) + $1,000(PVIF9.5%,8) P = $891.33 Calculator Solution: Enter Solve for 8 N 9.5% I/Y

PV $891.33

±$75 PMT

±$1,000 FV

http://ezto.mhhm.mcgraw-hill.com/hm.tpx [2012-02-29

3:19:13]

Assignment Results

The Timberlake-Jackson Wardrobe Co. has 11.1 percent coupon bonds on the market with ten years left to maturity. The bonds make annual payments. Required: If the bond currently sells for $1,148.91, what is its YTM? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Yield to maturity

Explanation:

8.80 ± 5% %

Here, we need to find the YTM of a bond. The equation for the bond price is: P = $1,148.91 =...