Firm B's management is interested in investing some of its idle cash to get a better return. The management decided to invest in one of the firms across its supply chain, Firm C, which is involved in meat and wool processing. Recently, Firm C has raised debt by issuing bonds, and Firm B is considering two issues:

Issue 1: Currently trading in the market at $100 per bond. These bonds have a 5.5% coupon rate that pays interest annually and matures in three years. The required rate of return on the bond is 5%, and the par value is $100.

Issue 2: Currently trading in the market at $99 per bond. These bonds have two years remaining until maturity and offer a 3% coupon rate with interest paid annually. The relevant market discount rate is 4% for this issue, and the par value is $100.

1. Discuss the impact of changes in interest rates on bond prices and the implications of such changes on issues 1 and 2. 2. Calculate the bond price for issues 1 and 2. Show all calculations to justify your answer. Report the formula used in pricing and show a timeline of the cash flows. Do you recommend investing in the bond issues, given the information above?

Answer rating: 100% (QA)

1 Interest rates and bond prices are inversely proportional Increase in interes... View the full answer