1. A $1000 face-value bond issued by Rugs Inc. currently matures in 18 years, pays annual coupon payments at a coupon rate of 9% and has a required return of 10% (per year). 

 

a. - Calculate a fair price for this bond today. 

b. - If you believe 3 years from now the appropriate rate of return will still be 10%, calculate what the price should be 3 years from now. 

c. - If you believe that 12 years from now the appropriate require return will still be 10%, calculate what the price should be. 

d. - If instead you believe that 12 years from now the appropriate required return will be 18%, calculate what the price should be 12 years from now 

e. - Succinctly and using terminology like required return and coupon rate, why is this price so much less than the $1000 par value of the bond.

 

Answer rating: 100% (QA)

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