The Walter company issued a 25 year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at 10% annual rate.

a. What is the bond's price today if the interest rate on comparable new issues is 12%?
b. What is the price today if the interest rate is 8%?
C. What is the price today if the interest rate is 10%?
D. Calculate the current yields for part a, b, and d.
E explain the results of parts a & b interm of oppoturnies avialable to investors.

Solution Preview

The Walter company issued a 25 year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at 10% annual rate.

Number of years to maturity= 20 =25-5

To calculate the price of the bond we need to calculate / read from tables the values of
PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
PVIF( n, r%)= =1/(1+r%)^n

a. What is the bond's price today if the interest rate on comparable new issues is 12%?

Price of bond
Coupon rate= 10.000%
Face value= $1,000
Interest payment per year= $100.00 =10.% x 1000

Frequency= S Semi Annual

No of years to maturity= 20
No of Periods=n= 40 =2x20

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