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The Nickelodeon Manufacturing Co.

The Nickelodeon Manufacturing Co. has a series of $1000 par value bonds outstanding. Each bond pays interest semi-annually and carries an annual coupon rate of 7%. Some bonds are due in three years while others are due in 10 years. If the required rate of return on bonds is 10%, what is the current price of:

a) the bonds with 3 years to maturity?
b) the bonds with 10 years to maturity?
c) Explain the relationship between the number of years until a bond matures and its price.
d) Explain the relationships between interest rates and the price of bonds as it relates to (i) premium (ii) Par and (iii) Discount.

Solution Preview

The Nickelodeon Manufacturing Co. has a series of $1000 par value bonds outstanding. Each bond pays interest semi-annually and carries an annual coupon rate of 7%. Some bonds are due in three years while others are due in 10 years. If the required rate of return on bonds is 10%, what is the current price of:

a) the bonds with 3 years to maturity?

We need to calculate how much the bonds have been issued by using the formula as follows: -

where B is the issued price/current price
...

Solution Summary

This solution is comprised of a detailed explanation to compute the current price of the bonds with 3 years to maturity and the bonds with 10 years to maturity, explain the relationship between the number of years until a bond matures and its price, and explain the relationships between interest rates and the price of bonds as it relates to (i) premium (ii) Par and (iii) Discount.

$2.19