In the March of 1994, you purchased a new 25-year bond. The principal amount (i.e. maturity value) of this bond is $1,000 and it pays a coupon rate of 12%.
a. If comparable bonds today (March of 2007) have a yield to maturity of 14%, what is your bond's current market price?
b. If interest rates on comparable bonds are currently 10%, what is your bond's current market price?
c. Explain why the prices are different from answers a and b (assuming they are different).
d. If your bond has a call feature and will be called in March of 2010 at a call price of $1150, what is the bond's current value if similar bonds currently return 14%?
This solution contains step-by-step calculations to determine the bond's current market price with yield-to-maturity of 14% and interest rates at 10%. It also works out the bond's current value if similar bonds return 14% with a call feature at a price of $1150.