Leggio Corporation issued 20-year, 7% annual coupon bonds attheir par

QUESTION

Leggio Corporation issued 20-year, 7% annual coupon bonds attheir par value of $1,000 one year ago. Today, the marketinterest rate on these bonds has dropped to 6%. What is thenew price of the bonds, given that they now have 19 years tomaturity?(Points: 4) &n
Lets find the present value of the cash flows. We have a 19 year annuity of 7% * 1000 = $70 We also have the par payment in 19 years: $1000 PV annuity = 70 / .06 * (1 1/(1 .06)^19) =

781.07 PV par = 1000 / 1.06^19 = 330.51 Adding the two together, we get price = PV = 781.07 330.51 =1111.58 The answer is B.

ANSWER:

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