Question

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The Ivanhoe Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a...

The Ivanhoe Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 10.075 percent. The current market rate for similar securities is 11.3 percent. Assume that the face value of the bond is $1,000. Suppose the bond were to mature in 12 years.

What will be the bond’s price if rates in the market (i) decrease to 9.30 percent or (ii) increase to 12.3 percent?

(i) Bond's price if rate decrease to 9.30 percent

(ii) Bond's price if rate increase to 12.3 percent

Solutions

Expert Solution

(i)-Bond's price if rate decrease to 9.30 percent

  • The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
  • The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
  • Here, the calculation of the Bond Price using financial calculator is as follows

Variables

Financial Calculator Keys

Figures

Par Value/Face Value of the Bond [$1,000]

FV

1,000

Coupon Amount [$1,000 x 10.075% x ½]

PMT

50.375

Market Interest Rate or Yield to maturity on the Bond [9.30% x ½]

1/Y

4.65

Maturity Period/Time to Maturity [12 Years x 2]

N

24

Bond Price

PV

?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,055.34.

“The Price of the Bond will be $1,055.34”

(ii)-Bond's price if rate increase to 12.3 percent

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

  • The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
  • Here, the calculation of the Bond Price using financial calculator is as follows

Variables

Financial Calculator Keys

Figures

Par Value/Face Value of the Bond [$1,000]

FV

1,000

Coupon Amount [$1,000 x 10.075% x ½]

PMT

50.375

Market Interest Rate or Yield to maturity on the Bond [12.30% x ½]

1/Y

6.15

Maturity Period/Time to Maturity [12 Years x 2]

N

24

Bond Price

PV

?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $862.29.

“The Price of the Bond will be $862.29”

jeff jeffy answered 2 weeks ago
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