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swilli
Jun 1, 2007, 07:38 AM
How would I set this problem up and what formula should I use?

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%
b. 10%
c. 13%

rafian
Jun 1, 2007, 09:40 AM
PV = C [ 1/r - 1/r(1+r)^t] + FV / (1+r)^25


a) PV = $70 x [ 1/.08 - 1/ .08(1.08)^25] + 1000 / (1.08)^25

= $70 x (12.5 - 1.825) + 146.02

= 747.25 + 146.02

= 893.27

hope you can do the rest.

P.S: C = coupon rate; r = interest rate; t = time