The Nickelodeon Manufacturing Co. has a series of $1000 par value bonds outstand

Question

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 6%. Some bonds are due in four 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 4 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

PLEASE SHOW WORK, I NEED TO LEARN THIS NOT JUST KNOW THE ANSWER.

THANK YOU

Explanation / Answer

(a) Price of a bond due in 4 years= 30PVIFA(5%,8)+1000PVIF(5%,8)= $870.736

(b)Price of a bond due in 10 years= 30PVIFA(5%,20)+1000PVIF(5%,20)= $750.756

(c)The nearer a bond is to maturity, the less the price is affected by changes in interest rates.

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