Spørsmål 10 Kokelia AG plans to issue 500 million of bonds with a face value of

Question

Spørsmål 10 Kokelia AG plans to issue 500 million of bonds with a face value of 100.000, coupon rate of 3.5 per cent and 10 years to maturity. The coupon is paid annually. The current market interest rate on these bonds is 6 per cent. In one year, the interest rate on the bonds will be either 8 per cent or 5 per cent with equal probability. Assume investors are risk-neutral. If the bond is not callable, what is the price of the bonds one year from now A 71,889 80,614 85,450 89,338. I choose not to answer.

Explanation / Answer

Expected interest rate after one year : [8*.5]+[5*.5]

          = 4+2.5

           = 6.5%

**since there is equal probability for price increase or decrease .50

years left to maturity :10-1=9

Interest = 100000*3.5% = 3500

Price of bond =[PVA6.5%,9*Interest ]+[PVF6.5%,9*Face vaue]

     = [6.6561*3500]+[.56735*100000]

     = 23296.36+ 56735

     = $ 80031

correct option is "B"   [nearest to 80614]

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