The Maryland Department of Transportation has issued 25-year bonds that make sem
ID: 2725300 • Letter: T
Question
The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 10.075 percent. The current market rate for similar securities is 11.8 percent. Assume that the face value of the bond is $1,000.
(a)
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.)
(b)
What will be the bond’s price if rates in the market (i) decrease to 9.80 percent or (ii) increase to 12.8 percent? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answers to 2 decimal places, e.g. 15.25.)
(c)
How do the interest rate changes affect premium bonds and discount bonds?
Bonds, in general,
in price when interest rates go up. When interest rates decrease, bond prices
.
(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 9.80 percent or (ii) increase to 12.8 percent? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answers to 2 decimal places, e.g. 15.25.)
Explanation / Answer
Ans:
= coupon rate (PVIFA 5.9% 25years) + (PVIFA 5.9% 25 last years)
= $100.75 * $46.551+ $2.391
= $4,930.906
= coupon rate (PVIFA 5.9% 25years) + (PVIFA 5.9% 25 last years)
= $98 * $46.551+ $2.391
= $4,796.316
= coupon rate (PVIFA 5.9% 25years) + (PVIFA 5.9% 25 last years)
= $128 * $46.551+ $2.391
= $6,264.57
(D)Suppose the bond maturity in 12 years, what will be bond price:
= coupon rate (PVIFA 5.9% 12years) + (PVIFA 5.9% 25 last years)
= $98 * 36.8879 + 1.5471
= $3,766.63
Coupon rate (PVIFA 5.9% 12years) + (PVIFA 5.9% 25 last years)
= 128 * 36.8879 + 1.5471
= $4,919.68
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