A General Power bona with a face value of $1,000 carries a coupon rate of 9.6%,

Question

A General Power bona with a face value of $1,000 carries a coupon rate of 9.6%, has 9 years until maturity, and sells at a yield to maturity of 8.6%. (Assume annual interest payments.) a. What interest payments do bondholders receive each year? Interest payments $ b. At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price $ c. What will happen to the bond price if the yield to maturity falls to 7.6%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price will by $

Explanation / Answer

a.

Calculation of interest payments do bondholders receive each year:

Interest per year = $1,000 * 9.6%

=$96

b.

Calculation of the price does the bond sell:

Bond price = Coupon payment [1-(1+r)-t /r ] + F/(1+r)t

= 8.6% [1-(1+ 9.6%)-9 /9.6%] + $1,000 / (1+9.6%)9

= $941.483

Therefore, the price of the bond sells at $941.483.

c.

Bond price = Coupon payment [1-(1+r)-t /r ] + F/(1+r)t

= 7.6% [1-(1+ 9.6%)-9 /9.6%] + $1,000 / (1+9.6%)9

= $882.965

Therefore, the price of the bond falls to $882.965.

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