ABC Corporation has recently issued a 20-year, semi-annual coupon bond with a face value of $5,000. The bond has a coupon rate of 4%.

Click to Open: Assignment 4 Excel Instructions.docx

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Scenario:

Current market interest rates for similar-risk bonds have fluctuated. Initially, the market interest rate was 5%, but due to some market changes and policy adjustments, the rates have dropped to 3% and are expected to rise to 6% over the next few years.

2. What is the semi-annual coupon payment that the bondholders receive?
4. Compute the initial price of the bond when the market interest rate was 5%.
6. Now, recompute the price of the bond given the drop in interest rates to 3%.
8. Predict the bond price if the market interest rates rise to 6%.
10. Calculate the Yield to Maturity (YTM) of the bond for each of the above interest rate scenarios (5%, 3%, 6%).
12. How does the change in market interest rates impact the bond's price and its Yield to Maturity?
14. Now, let's introduce a twist. Assume that ABC Corporation has a callable feature on the bond which allows them to buy back the bond at $5,200 after 10 years. How would this feature affect the bond's valuation?
16. If the interest rates dropped to 3% after 10 years, should ABC Corporation call the bond? Why or why not?