Exodus Limousine Company has 1000 par value bonds outstandin

Exodus Limousine Company has $1,000 par value bonds outstanding at 12 percent interest. The bonds will mature in 50 years. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Compute the current price of the bonds if the percent yield to maturity is: (Do not round intermediate calculations. Round your final answers to 2 decimal places. Assume interest payments are annual.)

Solution

Case 1

Calculation of Present Value of Interest Payments

Interest Amount = 1000*12% = 120

Present Value = 120*PVIFA (n = 50, i = 6%)

Present Value = 120*15.7619

Present Value of interest Payments = 1891.428

Calculation of Present Value of Principal Payment

Principal Amount = 1000

Present Value = 1000*PVFA (n = 50, i = 6%)

Present Value = 1000*0.05429

Present Value of Principal Payment = 54.29

Current Price of the Bond = Present Value of Interest Payment + Present Value of Principal Payments

Current Price of the Bond = 1891.428 + 54.29

Current Price of the Bond = 1945.72

Case 2

Calculation of Present Value of Interest Payments

Interest Amount = 1000*12% = 120

Present Value = 120*PVIFA (n = 50, i = 10%)

Present Value = 120*9.9148

Present Value of interest Payments = 1189.776

Calculation of Present Value of Principal Payment

Principal Amount = 1000

Present Value = 1000*PVFA (n = 50, i = 10%)

Present Value = 1000*0.00852

Present Value of Principal Payment = 8.52

Current Price of the Bond = Present Value of Interest Payment + Present Value of Principal Payments

Current Price of the Bond = 1189.776+8.52

Current Price of the Bond = 1198.30