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 percent 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 8 percent. At what price would the bonds sell? Round your answer to two decimal places.

B) Suppose that, 2 years after the initial offering, the going interest rate had risen to 16 percent. At what price would the bonds sell? Round your answer to two decimal places.

C) Suppose that the conditions in part a existed-that is, interest rates fell to 8 percent 2 years after the issue date. Suppose further that the interest rate remained at 8 percent for the next 8 years. What would happen to the price of the bonds over time?

I. The price of the bond will rise, approaching $1,000 at the maturity date.
II. The price of the bond will decline, approaching $1,000 at the maturity date.
III. The price of the bond will remain the same.

Explanation / Answer

A

Answer is 1114.933

B

Answer is 739.3845

C

The price of the bond will decline, approaching $1,000 at the maturity date.

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Cash 100 100 100 100 100 100 100 1100 Discount 0.925926 0.857339 0.793832 0.73503 0.680583 0.63017 0.58349 0.540269 Presnet value 92.59259 85.73388 79.38322 73.50299 68.05832 63.01696 58.34904 594.2958 Sum 1114.933

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