Assume Hawaiian Electric has a $1,000 par value bond outstanding that pays 9% annual interest (also,...
Assume Hawaiian Electric has a $1,000 par value bond outstanding that pays 9% annual interest (also, referred to as the coupon rate). If the current yield (also, referred as the market rate) to maturity on this bond is 12%, what is the price of the bond today if the time to maturity is 30 years? Does the price of the bond rise or fall if the time to maturity is 15 years? What is the exact price difference between the 30 year and 15 year bonds? Explain the reason(s) for the change in price between the two maturities.
Homework Answers
What is the price of the bond today if the time to maturity is
30 years?
=9%*1000/12%*(1-1/1.12^30)+1000/1.12^30
=758.344481
Does the price of the bond rise or fall if the time to maturity
is 15 years?
Rise
=9%*1000/12%*(1-1/1.12^15)+1000/1.12^15
=795.6740653
What is the exact price difference between the 30 year and 15
year bonds?
=758.344481-795.6740653
=-37.3295843
Explain the reason(s) for the change in price between the two
maturities.
As coupon rate is less than required return or market rate or yield
to maturity, the price increases with decrease in time to
maturity
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