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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This solution provides a detailed, step by step explanation of the given finance problem.
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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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