Suppose a firm is issuing 10,000 bonds. Each bond has a face amount of $950, a stated rate of 7.5%, and an 18-year term. When the bonds are issued, the market rate for similar bonds is 6.8%. What is the coupon (interest) payment of this bond? Based on the coupon (interest) payment found in (1.), what is the bond price when issued given the market rate of 6.8%? Based on your answer to (2.), explain why investors are either willing to pay more or less than the face amount of $950?
Suppose a firm is issuing 10,000 bonds. Each bond has a face amount of $950, a stated rate of 7.5%, and an 18-year term. When the bonds are issued, the market rate for similar bonds is 6.8%. What is the coupon (interest) payment of this bond? Based on the coupon (interest) payment found in (1.), what is the bond price when issued given the market rate of 6.8%? Based on your answer to (2.), explain why investors are either willing to pay more or less than the face amount of $950?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose a firm is issuing 10,000 bonds. Each bond has a face amount of $950, a stated rate of 7.5%, and an 18-year term. When the bonds are issued, the market rate for similar bonds is 6.8%.
- What is the coupon (interest) payment of this bond?
- Based on the coupon (interest) payment found in (1.), what is the
bond price when issued given the market rate of 6.8%?
- Based on your answer to (2.), explain why investors are either willing to pay more or less than the face amount of $950?
- How much capital does the firm raise assuming all 10,000 bonds are sold at the bond price you found in (2.)?
Suppose after 8 years an investor decides to sell their bond for $925.
- What is the yield to maturity after 8 years given the bond price of $925?
- Based on the yield to maturity you calculated in (5.), is the bond at par, a premium bond, or a discount bond? Why?
- What is the bond price after the 8th year if the yield to maturity is 7.5%?
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