Project Build A Tunnel bond (sold) at par with a face value of $10 million has a
Question:
Project Build A Tunnel bond (sold) at par with a face value of $10 million has a 6% annual coupon rate payable semiannually (3% semiannual rate) and a maturity of 20 years. Semiannual interest payments are typical for bonds of this kind. There are two situations to consider:
1. First, investors in the public market demand a return of 8% or (4% semiannual) return on their 3% semiannual bond investment. The bond now sells for $8,640,999. a) You are required to help the project sponsor(s) amortize this 20 years bond, (b) compute the total interest expense (not the coupon), (c) say whether this is a discount, par, or premium bond.
2. As a second consideration, assume that investors demand a 2% semiannual return for the 3% semiannual coupon bonds, while all other details remain the same. The bond now sells for $11,635,129. (a) You are required to help the project sponsor(s) amortize this 20 years bond, (b) compute the total interest expense, (c) say whether this is a discount, par, or premium bond.
Formula in Excel.