A company needs to raise money to expand and decides to issue a 3-year bond with a

Fantastic news! We've Found the answer you've been seeking!

Question:

A company needs to raise money to expand and decides to issue a 3-year bond with a face value of $1,000 and coupon rate of 8% per annum, payable every 6-months, in arrears, for the 3 year period.

a) Write down an expression for the fair market value (ie the price) of the bond at the issue date. Clearly define your parameters.

b) Given an effective annual interest rate of 7.12% per annum, determine the price of the bond at the issue date.

c) An investor bought the bond at issue. Two years later the effective annual interest rate has increased to 8.16% per annum and the investor decides to sell the bond. Determine the fair market value at which the investor should seek to sell the bond given the new interest rate.