A tax-exempt bond was recently issued at an annual 10 percent coupon rate and ma

Question

A tax-exempt bond was recently issued at an annual 10 percent coupon rate and matures 15 years from today. The par value of the bond is $1000

a] If required market rates are 10 percent, what is the market price of the bond?

b} If required market rate falls to 5 percent, what is the market price of the bond?

c] If required market rates rise to 14 percent, what is the market price of the bond ?

d] At what required market rate (10 percent, 5 percent, or 14 percent) does the above bond sell at a discount? At a premium?

Explanation / Answer

a)

If market interest rate is 10%, Bond will trade at par i.e. $1,000

b)

c)

d)

At 5% interest rate, bond is trading at premium and at 14% interest rate bond is selling at discount.

Face value (FV) $                                         1,000 Coupon rate 10.00% Number of compounding periods per year 1 Interest per period (PMT) $                                             100 Number of years to maturity 15 Number of compounding periods till maturity (NPER) 15 Market rate of return/Required rate of return 5.00% Market rate of return/Required rate of return per period (RATE) 5.00% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $                                   1,518.98

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