Katie Pairy Fruits Inc. has a $1,000, 20-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% × $1,000 = $150 per year). Assume that the current market-required interest rate on similar bonds is now only 12 percent.
a. Compute the current price of the bond.
b. Find the present value of 3 percent × $1,000 (or $30) for 20 years at 12 percent. The $30 is assumed to be an annual payment. Add this value to $1,000.
c. Explain why the answers in parts a and b are basically the same. (There is a slight difference due to rounding in the tables.)