7 - 8.29 The Maryland Department of Transportation has issued 25-year bonds that

Question

7 - 8.29

The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 10.375 percent. The current market rate for similar securities is 11.8 percent. Assume that the face value of the bond is $1,000. What is the current market value of one of these bonds? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final What will be the bond's price if rates in the market (I) decrease to 9.80 percent or (II) increase to 12.8 percent? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answers to 2 decimal places, e.g. 15.25.) How do the interest rate changes affect premium bonds and discount bonds? Bonds, in general, in price when interest rates go up. When interest rates decrease, bond prices Suppose the bond were to mature in 12 years. What will be the bond's price if rates in the market (I) decrease to 9.80 percent or (II) increase to 12.8 percent? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answers to 2 decimal places, e.g. 15.25.)

Explanation / Answer

a)

Given the current market rate of 11.800% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 10.375% (compounding Semi-Annually), should be selling for $886.11 (selling at a discount).

b)

i)

Given the current market rate of 9.800% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 10.375% (compounding Semi-Annually), should be selling for $1,053.31 (selling at a premium).

II)

Given the current market rate of 12.800% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 10.375% (compounding Semi-Annually), should be selling for $819.07 (selling at a discount).

c)

Bond price decrease whn interest rate increases and bond price increases when interest rate increases

d)

1)

Given the current market rate of 9.800% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 10.375% (compounding Semi-Annually), should be selling for $1,040.06 (selling at a premium)

2)

Given the current market rate of 12.800% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 10.375% (compounding Semi-Annually), should be selling for $853.29 (selling at a discount).

d)

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