Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a

Question

Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?

b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?

c. Suppose that 2 years after the issue date (as in part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?

) A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a

yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond

Explanation / Answer

Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000

par value, a 10% coupon rate, and semiannual interest payments.

a. Two years after the bonds were issued, the going rate of interest on bonds such as

these fell to 6%. At what price would the bonds sell?

Given:

TTM = 10 years Par = $1,000 Coupon = 10% ($50 payments) r = 6% (after two years)

Using Financial Functions on

n = (10 x 2) - (2 x 2) = 16 i = 6% x .5 = 3
PMT = $100 x .5 = 50 FV = 1000

PV = solve

PV = -$1,251.2220

Bond Price = $1,251.22

b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%.

At what price would the bonds sell?

Given:

TTM = 10 years Par = $1,000 Coupon = 10% ($50 payments) r = 12% (after two years)

Using Financial Functions on:

n = (10 x 2) - (2 x 2) = 16 i = 12% x .5 = 6
PMT = $100 x .5 = 50 FV = 1000

PV = solve

PV = -$898.9410

Bond Price = $1,251.22

Bond Price = $898.94

c. Suppose that 2 years after the issue date (as in part a) interest rates fell to 6%.

Suppose further that the interest rate remained at 6% for the next 8 years. What

would happen to the price of the bonds over time?

As time progresses, the price/value of the bond will slowly decrease. this table illustrates that:

Using Financial Functions: (Assume i, PMT, and FV remain constant for following figures)

n Price

20 $1,297.55

16 $1,251.22

12 $1,199.08

8 $1,140.39

4 $1,074.34

2 $1,038.27

Therefore, the price decreases over time.

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