Question

Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,170. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 13 percent annual interest payable semiannually, and has 18 years remaining until maturity. The current yield to maturity on similar bonds is 11 percent. a. Compute the new price of the bond. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to 2 decimal places.) New price of the bond $ 1,154.03

Please provide the solution, Thank you.

Answer 1

(Note: It is assumed that Yield to Maturity is compounded semiannualy. Therefore, discounting rate = 11/2 = 5.5%

Period	Cash Flow	Discounting Factor [1/(1.055^year)]	PV of Cash Flows (cash flows*discounting factor)
1	65	0.947867299	61.61137441
2	65	0.898452416	58.39940702
3	65	0.851613664	55.35488817
4	65	0.807216743	52.46908831
5	65	0.765134354	49.733733
6	65	0.725245833	47.14097915
7	65	0.687436809	44.68339256
8	65	0.651598871	42.35392659
9	65	0.617629261	40.14590198
10	65	0.585430579	38.05298766
11	65	0.554910502	36.06918262
12	65	0.525981518	34.18879869
13	65	0.498560681	32.40644426
14	65	0.472569366	30.71700877
15	65	0.447933048	29.11564813
16	65	0.424581088	27.59777074
17	65	0.402446529	26.15902439
18	65	0.381465904	24.79528379
19	65	0.361579056	23.50263866
20	65	0.342728963	22.27738262
21	65	0.324861577	21.11600248
22	65	0.307925665	20.01516823
23	65	0.291872668	18.97172344
24	65	0.276656558	17.98267624
25	65	0.262233704	17.04519075
26	65	0.248562753	16.15657891
27	65	0.235604505	15.31429281
28	65	0.223321805	14.51591735
29	65	0.211679436	13.75916337
30	65	0.200644016	13.04186101
31	65	0.190183901	12.36195357
32	65	0.180269101	11.71749153
33	65	0.170871185	11.10662705
34	65	0.161963209	10.52760857
35	65	0.153519629	9.978775899
36	65	0.145516236	9.458555355
36	1000	0.145516236	145.5162362
		Price of the Bond = Sum of PVs	1155.360684

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