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    Calculating the price of bonds in various market interest rates

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    3) Assume that General Motors Corporation sold an issue of bonds with a 10-year maturity, a $1000 par value, a 10% coupon rate, and semiannual interest payments.

    a. Two years after these bonds were issued, the going rate on bonds such as these fell to 6%.

    Calculate the price at which these bonds would sell.

    b. Assume that 2 years after their initial offering, the going rate for bonds such as these had risen to 12%.

    Calculate the price at which these bonds would sell.

    c. Assume that the conditions in Part a (above) existed; that is, interest rates fell to 6% two years after their issue date. Assume further, that the interest rate remained at 6% for the next 8 years.

    Explain what would happen to the price of these GM bonds over this 8-year time frame.

    SHOW ALL WORK.

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    ANSWERS

    Situation A
    Maturity 10 years
    Par $1,000
    Coupon rate 10% annual
    5% semiannual = 10% /2
    Coupon payment $50 = $1,000 x 5%

    Remaining maturity 8 = 10 - 2
    Going rate 6% annual
    3% semiannual = 6% /2
    Remaining period 16 = 8 x ...

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