Suppose a firm is issuing 10,000 bonds. Each bond has a face amount of $950, a stated rate of 7.5%,
Suppose a firm is issuing 10,000 bonds. Each bond has a face amount of $950, a stated rate of 7.5%, and an 18-year term. When the bonds are issued, the market rate for similar bonds is 6.8%.
- 1. What is the coupon (interest) payment of this bond?
- 2. Based on the coupon (interest) payment found in (1.), what is the bond price when issued given the market rate of 6.8%?
- 3. Based on your answer to (2.), explain why investors are either willing to pay more or less than the face amount of $950?
- 4. How much capital does the firm raise assuming all 10,000 bonds are sold at the bond price you found in (2.)?
Suppose after 8 years an investor decides to sell their bond for $925.
- 5. What is the yield to maturity after 8 years given the bond price of $925?
- 6. Based on the yield to maturity you calculated in (5.), is the bond at par, a premium bond, or a discount bond? Why?
- 7. What is the bond price after the 8th year if the yield to maturity is 7.5%?