Ace Apparel, Inc., a manufacturer, has just issued $1,000,000 principal amount o

Question

Ace Apparel, Inc., a manufacturer, has just issued $1,000,000 principal amount of bonds with a six percent semiannual coupon and a maturity of twenty years. The market rate of interest on similar bonds is eight percent (compounded semiannually)

a. How much did Ace Apparel receive for each $1,000 bond (ignore issue costs)?

b. If the market rate of interest were to increase to ten percent in exactly five years, at what price would the bonds then sell?

c. If you were to purchase a single $1,000 bond at issuance (part a) and then sell it at the market price five years later (part b), what would be your annual rate of return (APR) on this investment (this is called the

Explanation / Answer

C .

9.12%

PV 802.07 PMT 30 Yield 4% N 10 FV at end of year 5 $1,547.44 1000*(1+i)^5= $1,547.44 (1+i)^5 1.55 1+i 1.09 i

9.12%

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