20. Bond valuation. A tax-exempt bond was recently issued at an annual 8 percent

Question

20. Bond valuation. A tax-exempt bond was recently issued at an annual 8 percent coupon rate and matures 20 years from today. The par value of the bond is $5,000. (Hint: see Appendix G.) a. If required market rates are 8 percent, what is the market price of the bond? b. If required market rates fall to 4 percent, what is the market price of the bond? c. If required market rates rise to 12 percent, what is the market price of the bond? d. At what required market rate (8 percent, 4 percent, or 12 percent) does the above bond sell at a discount? At a premium?

Explanation / Answer

a

b

c

d

At 4% it sell at Premium

at 12% it sell at discount

Cash Flow PV factor 8% PV Interest 400 9.8181 3,927.26 Maturity Value 5000 0.2145 1,072.74 Value of Bond 5000

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