P/1) (8 points) Suppose Hillard Manufacturing sold an issue of bonds with a 10-y

Question

P/1) (8 points) Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments. a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell? b Suppose that 2 years after the issue date (as in part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years, what would happen to the price of the bonds over time?

Explanation / Answer

a)

b)

1 Par value (FV) $                                          1,000 2 Coupon rate 10.00% 3 Number of compounding periods per year 2 4 = 1*2/3 Interest per period (PMT) $                                          50.00 5 Number of years to maturity 8 6 = 3*5 Number of compounding periods till maturity (NPER) 16 7 Market rate of return/Required rate of return 6.00% 8 = 7/3 Market rate of return/Required rate of return per period (RATE) 3.00% Bond price after 2 years PV(RATE,NPER,PMT,FV)*-1 Bond price after 2 years $                                    1,251.22

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