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Bond Valuation and Changes in Maturity and Required Returns Suppose Level 10 Systems sold an issue...

Bond Valuation and Changes in Maturity and Required Returns Suppose Level 10 Systems sold an issue of bonds with a 15-year maturity, a $1,000 par value, a 6% coupon rate, and semiannual interest payments.

  1. Six years after the bonds were issued, the going rate of interest on bonds such as these fell to 5%. At what price would the bonds sell?

  2. Suppose that, 6 years after the initial offering, the going interest rate had risen to 8%. At what price would the bonds sell?

  3. Suppose that the conditions in part a existed—that is, interest rates fell to 5% 6 years after the issue date. Suppose further that the interest rate remained at 5% for the next 9 years. What would happen to the price of the bonds over time?

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Answer #1

Part (a): After 6 years, Interest rate  reduced to 5%. Price is ascertained using the PV function of Excel, at $1071.766818 as follows:

Alignment Values $1,000 6% Semiannual Clipboard Font 012 - foc =PV(D11/05,09,010,02,0) А B Formula Cell Ref. 2 Face Value (FV

Part (b): After 6 years of issue, if interest rate is increased to 8%, price decreases to $873.407030 as follows:

Clipboard Font Allghment Values $1,000 6% Semiannual D12 fc =PV(D11/D5,D9, D10, D2,0) A Formula Cell Ref. 2 Face Value (FV) G

Part (c): As per part (a), price had increased to $1071.77 on decrease in interest rate to 5% after 6 years of issue. When interest rate remains at the same level of 5% during the remaining tenure of 9 years, price gets adjusted on passage of time to reach the face value. Illustrated below

А I E F G H 1 6% $1,000 $1,000 $1,000 $1,000 $1,000 6% 6% 6% 6% Semiannual Semiannual Semiannual Semiannual Semiannual 2 15 2

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