Suppose that five years ago MRT Limited sold a 20 -year bond issue that had a...

Suppose that five years ago MRT Limited sold a 20 -year bond issue that had a $1000 par value and a 7 percent coupon rate. Interest is paid semiannually.

If the going interest rate has risen to 10 percent, at what price would the bonds sell today? (1.5 Marks)
Suppose that the interest rate remained at 10 percent for the next 15 years. What would happen to the price of the MRT Limited bonds over time?

Expert Solution

Period	Cash Flow	Discounting Factor [1/(1.05^year)]	PV of Cash Flows (cash flows*discounting factor)
1	35	0.952380952	33.33333333
2	35	0.907029478	31.74603175
3	35	0.863837599	30.23431595
4	35	0.822702475	28.79458662
5	35	0.783526166	27.42341583
6	35	0.746215397	26.11753888
7	35	0.71068133	24.87384655
8	35	0.676839362	23.68937767
9	35	0.644608916	22.56131207
10	35	0.613913254	21.48696387
11	35	0.584679289	20.46377512
12	35	0.556837418	19.48930964
13	35	0.530321351	18.56124727
14	35	0.505067953	17.67737835
15	35	0.481017098	16.83559843
16	35	0.458111522	16.03390327
17	35	0.436296688	15.27038407
18	35	0.415520655	14.54322292
19	35	0.395733957	13.8506885
20	35	0.376889483	13.1911319
21	35	0.358942365	12.56298276
22	35	0.341849871	11.96474549
23	35	0.325571306	11.3949957
24	35	0.31006791	10.85237686
25	35	0.295302772	10.33559701
26	35	0.281240735	9.843425723
27	35	0.267848319	9.374691165
28	35	0.255093637	8.9282773
29	35	0.242946321	8.503121238
30	35	0.231377449	8.098210703
30	1000	0.231377449	231.3774487
		Price of the Bond = Sum of PVs	769.4132346

Therefore, The Bond will sell today for $769.41

At maturity, the Price will be equal to Par Value. Currently, it is Below Par Value. Therefore, Over 15 years, Price will keep on Increasing upto $1000 at maturity.

jeff jeffy answered 2 years ago

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