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Asked Jan 17, 2019

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I need help to determine what formula to use to answer this question...

2. Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is

a. 7 percent.

b. 10 percent.

c. 13 percent.

Step 1

The Price at current yield to maturity of 7%:

The Price of bonds is computed by computing the present value of maturity value received at the end of 25 years ( or 50 semi annual periods) and the present value of semi annual interest received by the investors for 50 semi annual periods discounted at an annual rate of 7% (or 3.50% semi annually). The Present value factor for maturity value is applied and Annuity Present value factor for Interest payments is applied for computing the present values of both.

The sum of both the present values is Current price of bonds, which is computed as $ 1117.28

Step 2

when yield to maturity is 10%

All the step remain same except the discount factor which now has to be table at 5% (i.e. 10%/2) instead of 3.50% earlier.

The current price of bonds at 10% maturity yield is $ 817.44

Step 3

When Yield to maturity is 13%:

All the steps remain same except the discount factor which now ...

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