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9966 [12]
3 years ago
5

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

ual interest payments.
a. 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?
b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?
c. 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?
Business
1 answer:
Alenkasestr [34]3 years ago
3 0

Answer:

A) Market Value:  $1,251.2220

B) Market Value: $898.94

C) the price of the bonds will decrease over time. As the nominal amount will suffer from less discounting over time at maturity will match the nominal amount of $ 1,000. To do so It need to decrease over time.

Explanation:

The value of the bonds will be the present value of the future coupon payment and maturity at the new rate of 6%

PV of the coupon payment

C \times \frac{1-(1+r)^{-time} }{rate} = PV\\

C 50.000 (1,000 x 10% / 2 ayment per year)

time 16 (8 year to maturity x 2 payment per year)

rate 0.03 (6% over two payment per year)

50 \times \frac{1-(1+0.03)^{-16} }{0.03} = PV\\

PV $628.0551

PV of the maturity

\frac{Maturity}{(1 + rate)^{time} } = PV  

Maturity   1,000.00

time   16.00

rate  0.03

\frac{1000}{(1 + 0.03)^{16} } = PV  

PV   623.17

PV c $628.0551

PV m  $623.1669

Total $1,251.2220

<em><u>If the rate is 12%</u></em>

PV of the coupon payment:

C \times \frac{1-(1+r)^{-time} }{rate} = PV\\

C 50.000

time 16

rate 0.06

50 \times \frac{1-(1+0.06)^{-16} }{0.06} = PV\\

PV $505.2948

PV of the maturity:

\frac{Maturity}{(1 + rate)^{time} } = PV  

Maturity   1,000.00

time   16.00

rate  0.06

\frac{1000}{(1 + 0.06)^{16} } = PV  

PV   393.65

PV c $505.2948

PV m  $393.6463

Total $898.9410

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