Riordan Inc. offers a 7 percent coupon bond that has a $1,000 par value, semiannual coupon payments and a yield to maturity of 7.73%. The bond matures in 9 years. What is the price of the bond?

Transcribed Image Text:

Sumitomo-Mitsui Bank (the Bank) was found not to have not breached its duty of explanation when an interest-rate swap agreement was executed between the Bank and a customer (the Company), under which fixed and floating interest rates would be swapped and the resulting difference settled [see Exhibit 1]. BACKGROUND The Company was a corporation that managed pachinko parlors. On December 30, 2003, the Company borrowed 1.5 billion from the Bank, which was the Company's main financial institution. The loan was made under the condition that a variable-rate interest of 0.75% per annum would be added to the Tokyo Interbank Offering Rate (TIBOR). When the loan was made, Mr. Arai, a Bank employee, knew that the Company had often borrowed from other banks under variable-rate-interest conditions. Mr. Arai suggested the transaction in question as an instrument to hedge against risk associated with rising interest rates. The transaction in question was an interest-rate swap agreement. That is, based on an agreement between the concerned parties, a certain notional principal and a transaction period were set and fixed, variable interest rates swapped in the same currency, and the resulting difference settled. This was a simple "plain vanilla interest-rate swap interest-rate swap" deal. Such a swap could be further categorized as either a spot-start swap under which transactions commenced simultaneously with the execution of the agreement, or a forward-start swap, under which transactions commenced after a certain period following the execution of the agreement had elapsed. Sumitomo-Mitsui Bank (the Bank) was found not to have not breached its duty of explanation when an interest-rate swap agreement was executed between the Bank and a customer (the Company), under which fixed and floating interest rates would be swapped and the resulting difference settled [see Exhibit 1]. BACKGROUND The Company was a corporation that managed pachinko parlors. On December 30, 2003, the Company borrowed 1.5 billion from the Bank, which was the Company's main financial institution. The loan was made under the condition that a variable-rate interest of 0.75% per annum would be added to the Tokyo Interbank Offering Rate (TIBOR). When the loan was made, Mr. Arai, a Bank employee, knew that the Company had often borrowed from other banks under variable-rate-interest conditions. Mr. Arai suggested the transaction in question as an instrument to hedge against risk associated with rising interest rates. The transaction in question was an interest-rate swap agreement. That is, based on an agreement between the concerned parties, a certain notional principal and a transaction period were set and fixed, variable interest rates swapped in the same currency, and the resulting difference settled. This was a simple "plain vanilla interest-rate swap interest-rate swap" deal. Such a swap could be further categorized as either a spot-start swap under which transactions commenced simultaneously with the execution of the agreement, or a forward-start swap, under which transactions commenced after a certain period following the execution of the agreement had elapsed.

Answer rating: 100% (QA)

First we need to calculate the semiannual coupon payment Coupon ... View the full answer