3. Solve the following problems: i.Renfro Rentals has issued bonds that have a 1

Question

3. Solve the following problems:

i.Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the bonds?

ii.Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?

Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?

Suppose that 2 years after the issue date (as in part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?

Explanation / Answer

3) i) Price of the bond is the PV of the expected cash flows from the bond if is held till maturity, the discount rate being the YTM. The cash flows are: *the maturity value of $1000 receivable at EOY 8 *the semiannual interest of $50, which is an annuity Halfyearly discount rate = 8.5%/2 = 4.25% Therefore, Price of the bond = 1000/1.0425^16+50*(1.0425^16-1)/ (0.0425*1.0425^16) = $    1,085.80 ii) a) Price when the rate falls to 6%: = 1000/1.03^16+50*(1.03^16-1)/(0.03*1.03^16) = $    1,251.22 Price when the rate rises to 12% = 1000/1.06^16+50*(1.06^16-1)/(0.06*1.06^16) = $       898.94 What happens to the price of the bonds over time (Part a): The price of the bond will decrease gradually as it nears maturity and become equal to its face value of $1000.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.