Question

John Wilson is a conservative investor who has asked your advice about two bonds he is considering. One is a seasoned issue of the Capri Fashion Company that was first sold 22 years ago at a face value of $900, with a 25-year term, paying 8%. The other is a new 30-year issue of the Gantry Elevator Company that is coming out now at a face value of $900. Interest rates are now 8%, so both bonds will pay the same coupon rate. Assume bond coupons are paid semiannually.

What is each bond worth today? Round the answers to the nearest cent.

Capri Fashion Company bond: $

Gantry Elevator Company bond: $

If interest rates were to rise to 16% today, estimate without making any calculations what each bond would be worth. The input in the box below will not be graded, but may be reviewed and considered by your instructor.

If interest rates were to rise to 16% today, find what each bond would be worth to decide which bond is the better investment in this case. Do not round intermediate calculations. Round PVFA and PVF values in intermediate calculations to four decimal places. Round the answers to the nearest cent.

Capri Fashion Company bond: $

Gantry Elevator Company bond: $

If interest rates are expected to fall, which bond is the better investment?

Are long-term rates likely to fall much lower than 6%? Why or why not? (Hint: Think about the interest rate model and its components.) The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Answer 1

1. What is each bond worth today? Round the answers to the nearest cent.

Capri Fashion Company bond: $900

Gantry Elevator Company bond: $900

Because the market interest rate is equal to bond coupon rates, when they both are equal then the bonds ware traded at face value

2. If interest rates were to rise to 16% today, estimate without making any calculations what each bond would be worth. The input in the box below will not be graded, but may be reviewed and considered by your instructor.

The Bond Price and market interest rates are inversely related when the market interest rates increases then the bond price will decrease.

3. If interest rates were to rise to 16% today, find what each bond would be worth to decide which bond is the better investment in this case. Do not round intermediate calculations. Round PVFA and PVF values in intermediate calculations to four decimal places. Round the answers to the nearest cent.

Capri Fashion Company bond: $733.60

Gantry Elevator Company bond: $454.47

If interest rates are expected to fall, which bond is the better investment?

as said earlier The Bond Price and market interest rates are inversely related, the effect of inversion will be higher on long term bond than short term bonds, thus when interest rates fall then investment on short term bonds will be beneficial thus invest in Capri Cushion Company bond.

Are long-term rates likely to fall much lower than 6%? Why or why not? (Hint: Think about the interest rate model and its components.) The input in the box below will not be graded, but may be reviewed and considered by your instructor.

as said earlier The Bond Price and market interest rates are inversely related, the effect of inversion will be higher on long term bond than short term bonds, thus when interest rates fall then investment on short term bonds will be beneficial thus invest in Capri Cushion Company bond.

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