Suppose Turner enterprises sold an issue of bonds with the following original ma

Question

Suppose Turner enterprises sold an issue of bonds with the following original maturity (n), par value (M), coupon rate, and semiannual interest payments. Two years after the bonds were issued, the going rate of interest on bonds such as these rose to 14%. At what price would the bonds sell? At what price would the bonds sell if the interest rate had fallen to 9%?

Suppose Turner Enterprises sold an issue of bonds with the following original maturity (n), par value (M), coupon rate, and semiannual interest payments. Two years after the bonds were issued, the going rate of interest on bonds such as these rose to 14%. At what price would the bonds sell? At what price would the bonds sell if the interest rate had fallen to 9%? 25 14.00% INPUT DATA 2 year 2 Par $1,000 d2a d2b 9.00% | coupon rate 11.62% 2

Explanation / Answer

when rate = 14%

N = 46 (since 2 years have passed and 23 years remain)

FV = 1000

rate = 7%

PMT = 11.62%/2 * 1000 = 58.1

use PV function in Excel:

price of bond = 837.5648

when rate falls to 9%

rate = 4.5%

Using the same PV function and other data above

price of bond = 1252.6777

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