Bond Valuation and Changes in Maturity and Required Returns Suppose Hillard Manu
ID: 2637633 • Letter: B
Question
Bond Valuation and Changes in Maturity and Required Returns
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 7%. At what price would the bonds sell? Round the answer to the nearest cent.
$
Suppose that 2 years after the initial offering, the going interest rate had risen to 15%. At what price would the bonds sell? Round the answer to the nearest cent.
$
Explanation / Answer
1. Price of Bond would be selling after 2 years = $50 * PVAF(3.5%, 16Years) + $1,000 * PVF(3.5%, 16Years) = $1,180.30
2. Price of Bond would be selling after 2 years = $50 * PVAF(7.5%, 16Years) + $1,000 * PVF(7.5%, 16Years) = $772.35