2. a. A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If curr

Question

2. a. A $1,000 bond has a 7.5 percent coupon and matures after 10 years. If current interest rates are 10 percent, what should be the price of the bond?
b. If after six years interest rates are still are still 10 percent, what should be the price of the bond?
c. Even though interest rates did not change in a and b, why did the price of the bond change?
d. Change the interest rate in a and b to 6 percent and rework your answers. Even though the interest rate is 6 percent in both calculations, why are the bond prices different?

Explanation / Answer

a) Price = $1,000 x 0.3855 + $1,000 x 7.5% x 6.1446 Price = $385.50 + $460.85 Price = $846.35 b) Price = $1,000 x 0.6830 + $1,000 x 7.5% x 3.1699 Price = $683 + $237.74 Price = $920.74 c)The price of the bond changed because certain time period passed. d) Price = $1,000 x 0.5584 + $1,000 x 7.5% x 7.3601 Price = $558.40 + $552.01 Price = $1,110.41

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