Red Frog Brewery has $l,000 par value bonds outstanding with the following characteristics currently selling at par 5 years until final maturity and a 9 percent coupon rate (with interest paid semiannually) Interestingly, Old Chicago Brewery has a very similar bond issue outstanding In fact, every ...

a Old Chicagos 15year bonds should show a greater price change than Red Frogs bond ...

Red Frog Brewery has $l,000-par-value bonds outstanding with the following characteristics: currently selling at par; 5 years

Question:

Red Frog Brewery has $l,000-par-value bonds outstanding with the following characteristics: currently selling at par; 5 years until final maturity; and a 9 percent rate (with interest paid semiannually). Interestingly, Old Chicago Brewery has a very similar bond issue outstanding. In fact, every bond feature is the same as for the Red Frog bonds, except that Old Chicago's bonds mature in exactly 15 years. Now, assume that the market's nominal annual required rate of return for both bond issues suddenly fell from 9 percent to 8 percent.
a. Which brewery's bonds would show the greatest price change? Why?
b. At the market's new, lower required rate of return for these bonds, determine the per bond price for each brewery's bonds. Which bond's price increased the most, and by how much?
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...