Olaf Limited is considering alternative sources of funds to finance its production of the non-alcohol-based hand sanitization
Question:
Olaf Limited is considering alternative sources of funds to finance its production of the non-alcohol-based hand sanitization gel. Recently, it offered a coupon bonds with maturity period of 20 years. The annual coupon rate of the bonds is 5.75% and the yield on the bonds is estimated as 7% per annum. Par value of coupon bond is $1,000 and coupon is payable annually.
Required:
a. Estimate the maximum price that an investor should pay for these corporate bonds today.
b. Estimate the price of the bond after one year if the annual yield to maturity falls to 6%.
c. Identify the relationship of the bond price with interest rate based on results on part a and b.
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow