A. The Maryland Department of Transportation has issued 25-year bonds that make
ID: 2723706 • Letter: A
Question
A. The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 9.725 percent. The current market rate for similar securities is 11.7 percent. Assume that the face value of the bond is $1,000.
What is the current market value of one of these bonds? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answer to 2 decimal places, e.g. 15.25.)
Current market value_____________
B. What will be the bond’s price if rates in the market (i) decrease to 9.70 percent or (ii) increase to 12.7 percent? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answers to 2 decimal places, e.g. 15.25.)
Bond's price(i)Decrease to 9.70 percent$_______________
(ii)Increase to 12.7 percent$_______________
C. How do the interest rate changes affect premium bonds and discount bonds?
D.Suppose the bond were to mature in 12 years. What will be the bond’s price if rates in the market (i) decrease to 9.70 percent or (ii) increase to 12.7 percent?
(i)Bond's price if rate decrease to 9.70 percent___________
(ii) Bond's price if rate increase to 12.7 percent__________________
Current market value_____________
B. What will be the bond’s price if rates in the market (i) decrease to 9.70 percent or (ii) increase to 12.7 percent? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answers to 2 decimal places, e.g. 15.25.)
Bond's price(i)Decrease to 9.70 percent$_______________
(ii)Increase to 12.7 percent$_______________
C. How do the interest rate changes affect premium bonds and discount bonds?
Bonds, in general, (increase/decrease), in price when interest rates go up. When interest rates decrease, bond prices (increase/ decrease)
D.Suppose the bond were to mature in 12 years. What will be the bond’s price if rates in the market (i) decrease to 9.70 percent or (ii) increase to 12.7 percent?
(i)Bond's price if rate decrease to 9.70 percent___________
(ii) Bond's price if rate increase to 12.7 percent__________________
Explanation / Answer
Answer:A Years to maturity = n = 25
Coupon rate = C = 9.725%
Semiannual coupon = $1,000 × (0.09725/2) = $48.625
Current market rate = i = 11.7%
Present value of bond = P B
=$48.625*PVIFA(5.85%,50)+$1000*PVIF(5.85%,50)
=841.03
Answer:B (i) decrease to 9.70 percent or
Present value of bond = P B
=$48.625*PVIFA(4.85%,50)+$1000*PVIF(4.85%,50)
=1002.34
(ii) increase to 12.7 percent
Present value of bond = P B
=$48.625*PVIFA(6.35%,50)+$1000*PVIF(6.35%,50)
=776.53
Answer:C Bonds, in general, decrease in price when interest rates go up. When interest rates decrease, bond prices increase.
Answer:D
(i) decrease to 9.70 percent or
Present value of bond = P B
=$48.625*PVIFA(4.85%,24)+$1000*PVIF(4.85%,24)
=1001.75
(ii) increase to 12.7 percent
Present value of bond = P B
=$48.625*PVIFA(6.35%,24)+$1000*PVIF(6.35%,24)
=819.2
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