Bond Valuation and Changes in Maturity and Required Returns Suppose Hillard Manu
ID: 2772855 • Letter: B
Question
Bond Valuation and Changes in Maturity and Required Returns
Suppose Hillard Manufactoring sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate and semiannual 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?
The answer is $1,251.22--show all work/formula
b. Suppose that 2 years after the initial offering the going interest rate had risen to 12%. At what price would the bonds sell?
The answer is $898.94. Show all work/formula.
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.
Provide a summary-logical answer.
Explanation / Answer
Bond Valuation and Changes in Maturity and Required Returns
Suppose Hillard Manufactoring sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate and semiannual 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?
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) =(10-2)*2 = 16
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*10%*1/2 = 50
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = 6%*1/2 = 3%
Bond Value = pv( 3%,16,50,1000)
Bond Value = $ 1251.22
b. Suppose that 2 years after the initial offering the going interest rate had risen to 12%. At what price would the bonds sell?
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) =(10-2)*2 = 16
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*10%*1/2 = 50
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = 12%*1/2 = 6%
Bond Value = pv( 6%,16,50,1000)
Bond Value = $ 898.94
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.
Price of the bonds over time i.e at 10 year
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) =(10-2-8)*2 = 0
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*10%*1/2 = 50
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = 6%*1/2 = 3%
Bond Value = pv( 3%,0,50,1000)
Bond Value = $ 1000
As the bonds move to maturity the Bond Value is being adjusted toward Par Value