Assume all bonds pay interest semiannually.1. The Altoona Company issued a 25-year bond 5 years ago...

Assume all bonds pay interest semiannually.1. The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate.

a. What is the bond's price today if the interest rate on comparable new issues is 12%?

b. What is the price today if the interest rate is 8%?

c. Explain the results of parts a and b in terms of opportunities available to investors.

d. What is the price today if the interest rate is 10%?

e. Comment on the answer to part d.

Solutions

Expert Solution

1.
=PV(12%/2,2*20,-10%*1000/2,-1000)=849.537031284751

2.
=PV(8%/2,2*20,-10%*1000/2,-1000)=1197.92773883426

3.
Higher return means lower price

4.
=PV(10%/2,2*20,-10%*1000/2,-1000)=1000

5.
When coupon rate is equal to required return, the bond trades at par

jeff jeffy answered 2 years ago

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