MillTower Corporation raises funds to build windpumps by issuing 3-year bonds wi
ID: 1133415 • Letter: M
Question
MillTower Corporation raises funds to build windpumps by issuing 3-year bonds with a coupon rate of 5% and a face value of $1,500. Assume that the market interest rate for a 3-year bond issued by a firm like MillTower 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 MillTower bond has increased to 7%. The price of the MillTower bond changes to __________, which means that it sells at_____________.
Suppose that instead of rising, the market rate decreases from 5% to 2%. The new price of the bond changes to __________ , which means that the bond sells at______________ .
Explanation / Answer
The Price of each of the bonds is $1000, which means bonds sell at Par. When the market rate of Interest is increased to 7%, the price of bonds will be $ 1420, which means the bonds sells at Discount Explanation: Par value of bonds 1500 Coupon Interest (1500*5%*6/12) 37.5 Annuity factor for 6 periods at 3.5% 5.3286 PVF for 6th period at 3.5% 0.8135 Present value of Par value 1220.25 Present value of Interest 199.8225 Issue price 1420.073 When the market rate of interest is decreases to 2%, the price of bonds will be $ 1630, which means the bonds sells at premium. Explanation: Par value of bonds 1500 Coupon Interest (1500*5%*6/12) 37.5 Annuity factor for 6 periods at 1% 5.7955 PVF for 6th period at 1% 0.942 Present value of Par value 1413 Present value of Interest 217.3313 Issue price 1630.331