Question

Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issue by the leisure time corporation. The $1,000 par value bond pays 6% annual interest and has 15 years remaining to maturity. The current yield to maturity on similar bonds is 11%.

A. What is the current price of the bond?

B. By what percent will the price of the bonds increase between now and maturity?

Do not round intermediate calculations and round answers to 2 decimal places.

Answer 1

Par/Face value	1000
Coupon rate	0.06
Annual coupon	60
Present Value = Future value/ ((1+r)^t)
where r is the yield to maturity that is .11 and t is the time period
Price of the bond = sum of the present values of future cash flows
t	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
future cash flow	60	60	60	60	60	60	60	60	60	60	60	60	60	60	1060
present value	54.05	48.70	43.87	39.52	35.61	32.08	28.90	26.04	23.46	21.13	19.04	17.15	15.45	13.92	221.54
price	640.46
A. The current price of the bond is $640.46.
B. At maturity, the price of the bond will be the par value.
% increase in price	(1000 - 640.46)/(640.46)
The price of the bond will increase 56% between now and maturity.