Price of bond
Not what you're looking for?
O,Meara, Inc., plans to issue $6 million of perpetual bonds. The face value of each bond is $1,000.
The semi-annual coupon on the bonds is 4.5%. Market interest rates on one-year bonds are 8%.
With equal probability, the long-term market interest rate will be either 12% or 6% next year. Assume investors are risk-neutral.
a. If the O'Meara bonds are non callable, what is the price of the bonds?
b. If the bonds are callable one year from today at $1,250, will their price be greater or less than the price you computed in (a)? Why?
Purchase this Solution
Solution Summary
The solution explains how to calculate the price of non-callable bonds given the expectation of future interest rates.
Solution Preview
a. If the O'Meara bonds are noncallable,what is the price of the bonds?
The price of the bond today would be the discounted sum of the cash flows to the investor. The cash flow to the investor are the coupon interest and the price of the bond one year from today. The interest amount is $45 every six months. The price of the bond at the end of 1 year would depend on the interest rate. For a perpetual bond, ...
Purchase this Solution
Free BrainMass Quizzes
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
SWOT
This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.