Question

Suppose Ford Motor Company sold an issue of bonds with a 10-year maturity, a $1000 par value, a 10 percent 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 percent. At what price would the bonds sell?

b) Suppose that, two years after the initial offering, the going interest rate had risen to 12 percent. At what price would the bonds sell?

c)Suppose that conditions in part A existed - That is, interest rates fell to 6 percent two years after the issue date. Supose further that the interest rate remained at 6 percent for the next eight years. Describe what would happen to the price of Ford Motor Company bonds over time.

Please explain with detail... I'm a little bit lost in this class.

Answer 1

a)

b)

c)

Bond price will decrease gradually over the 8 years to reach par value i.e. $1,000. In this case, bond price will decrease only when other things remain constant. Here, other things remained constant.

Hence, bonds will decrease slowely to reach $1,000.