Question

Bond Valuation and Changes in Maturity and Required Returns

Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 7%. At what price would the bonds sell? Round your answer to the nearest cent.

$

Suppose that 2 years after the initial offering, the going interest rate had risen to 16%. At what price would the bonds sell? Round your answer to the nearest cent.

$

Suppose that 2 years after the issue date (as in Part a) interest rates fell to 7%. Suppose further that the interest rate remained at 7% for the next 8 years. What would happen to the price of the bonds over time?

I. The price of the bond will decline, approaching $1,000 at the maturity date.

II. The price of the bond will remain the same.

III. The price of the bond will rise, approaching $1,000 at the maturity date.

-Select-

Answer 1

Value of Bond is equal to the present value of all future interest payments and the principal amount

Selling price of Bond = 50*PVAF(3.5%,16 periods) + 1,000*PVF(3.5%, 16 periods)

= 50*12.094 + 1,000*0.577

= $1,181.7

Selling price of Bond = 50*PVAF(8%,16 periods) + 1,000*PVF(8%, 16 periods)

= 50*8.851 + 1,000*0.292

= $734.55

I. The price of the bond will decline, approaching $1,000 at the maturity date.