The Durango Company issued a 25-year bond 5 years ago with a face value of $1,00

Question

The Durango Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual coupon rate. What is die bond's price today if the interest rate on comparable newly issued bonds is I2%? What is the price today if the interest rate is 8%? Explain the results of parts a and b in terms of opportunities available to investors. What is the price today if the rate is 10%? Comment on your answer to part d. A company's bonds currently sell for $1,200 They pay a 6 5% annual coupon rate, have a 10 year maturity, and a $1,000 par value The bonds can be called in 5 years at $ 1.065 Calculate the difference between this bond's YTM and its YTC (if called in 5 years).

Explanation / Answer

a. The price of a bond if the interest rate today is 12% will be PV(0.12/2, 20*2,100/2,1000) = $849.54

b. The price of a bond if the interest rate today is 8% will be PV(0.08/2,20*2,100/2,1000) =$1,197.93

c. The price of a bond if the interest rate today is 10% will be same as face value =$1,000

d. We can see than when interest rate rises , the value of the bond reduces. Therefore there is an inverse relationship between price of the bond and interest rate.

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