E 10-1

Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 12 percent annual interest. The current yield to maturity on such bonds in the market is 13 percent. UseAppendix BandAppendix Dfor an approximate answer but calculate your final answer using the formula and financial calculator methods.

Compute the price of the bonds for the maturity dates:(Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)

Bond Price

a.30 years =

b.20 years =

c. 3 year =

E10-2

Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,180. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 10 percent interest, and it has 19 years remaining until maturity. The current yield to maturity on similar bonds is 8 percent.

a.Calculate the present value of the bond.UseAppendix BandAppendix Dfor an approximate answer but calculate your final answer using the formula and financial calculator methods.(Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)

Present Value=

E10-3

Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point as described below:

Real rate of return3%Inflation premium4Risk premium5Total return12%

Assume that five years later the inflation premium is only 3 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 20 years remaining until maturity.

Compute the new price of the bond. UseAppendix BandAppendix Dfor an approximate answer but calculate your final answer using the formula and financial calculator methods.(Do not round intermediate calculations. Round your final answer to 2 decimal places. Assume interest payments are annual.)

New price of the bond=