Use the information provided to answer the following questions: a) Kmiec Company

Question

Use the information provided to answer the following questions:

a) Kmiec Company is using a 20 year, 12% annual coupon bond. If the current interest rate is 9%, how much should Mike pay for the bond? Is the bond selling at a discount or a premium?

b) Two years later, Mike is looking at Ku Company bonds. Ku is issuing a 20 year, 12% bond as well. Now, the current interest rate is 14%. How much should mike pay for this bond and is it selling at a discount or a premium?

c) What is causing the difference in price between the two bonds?

Explanation / Answer

(a)

Price= 120PVIFA(9%,20)+1000PVIF(9%,20)

Price= (120x9.1285)+(1000x.1784)

P= $1273.82, the bond selling at a preium

(b) P= 120PVIFA(14%,20)+1000PVIF(14%,20)

= (120x6.6231) +(1000x.0728)

Price= $867.57, the bond selling at a discount

(c) interest rate is causing the difference in price between the two bonds. Increase in Interest rate from 9% to 14% caused the price of the bond to fall.

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