1. Your company has identified investments for your hospital in long term, fixed
ID: 2719234 • Letter: 1
Question
1. Your company has identified investments for your hospital in long term, fixed income bonds. Your manager is expecting you to complete a comprehensive, analytical, response to this project (details to follow) . Assume your firm sold bonds that have a 10-year maturity, a 12.5 percent coupon rate with annual payments, and $1,000 par value,
a) Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent. What would be the bonds’ value?
b) Suppose that two years after the bonds were issued, the required interest rate rose to 13 percent. What would be the bonds’ value?
c) What would be the value of the bonds three years after issue in each scenario above, assuming
that interest rates stayed steady at 7 percent or 13 percent?
SHOW WORK
Explanation / Answer
Solution:
a)
b)
c)
Value of Bond'S Issued Par Value of Bond 1,000 Coupon Payment - 12. 5% * 1,000 125 Years to maturity left - 8 years Present Value of Interest - Coupon Payment 125 Present value $ 1 @ 7 % for 8 years 5.971 Pressent value of coupin payment 746.375 Par Value of Bond 1,000 Present value of $ 1 @ 7 % 0.582 582 Value of Bond 1,328.38Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.