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Marina86 [1]
3 years ago
10

ReNew Corporation raises funds to build renewable energy systems by issuing 3-year bonds with a coupon rate of 6% and a face val

ue of $1,600. Assume that the market interest rate for a 3-year bond issued by a firm like ReNew is currently the same as the coupon rate. The price of each of these bonds is____ , which means that the bonds sell at ___. Suppose that the market interest rate for bonds that are similar to the ReNew bond has increased to 7%. The price of the ReNew bond changes to____ , which means that it sells at ____. Suppose that instead of rising, the market rate decreases from 6% to 4%. The new price of the bond changes to ___, which means that the bond sells at ___.
Business
1 answer:
Neko [114]3 years ago
4 0

Answer:

<em>The price of each of these bonds is </em><em><u>$1,600, </u></em><em>which means that the bonds sell at</em><em><u> par</u></em><em>. </em>

<em>Suppose that the market interest rate for bonds that are similar to the ReNew bond has increased to 7%. The price of the ReNew bond changes to </em><em><u>$1,558.00</u></em><em> , which means that it sells at </em><em><u>discount</u></em><em>. </em>

<em>Suppose that instead of rising, the market rate decreases from 6% to 4%. The new price of the bond changes to </em><em><u>$1,688.80</u></em><em>, which means that the bond sells at a </em><em><u>premium</u></em><em>.</em>

When the coupon rate and the market interest rate are the same, the price will be at par.

Interest rate increases:

Bond Price = Present value of coupon + Present value of bond price

Coupon = 6% * 1,600

= $96

Bond price = 96 * (1 - 1.07⁻³ / 0.07) + 1,600 / 1.07³

Bond price = $1,558.00

Interest rate decreases:

= 96 * (1 - 1.04⁻³ / 0.04) + 1,600 / 1.04³

= $1,688.80

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