Question

Suppose that five years ago MRT Limited sold a 20 -year bond issue that had a $1000 par value and a 7 percent coupon rate. Interest is paid semiannually.

1. If the going interest rate has risen to 10 percent, at what price would the bonds sell today? (1.5 Marks)
2. Suppose that the interest rate remained at 10 percent for the next 15 years. What would happen to the price of the MRT Limited bonds over time?

Answer 1

Required 1

Since 5 years have pased and the total life of the bond was 20 years , the remaining life = 15 years

Price of bond at T5 = Pv of all the future payments discounted at 10%

= $1000*7% * PVF-AD(10%,15years) + $1000 * PVF (10%,15years)

= $70 * 7.60608 + $1000 * 0.23939

= $771.82

Required 2

If the interest rate remained at 10% for 15 years, MRT limited's bond price would increase gradually over time and would reach $1000 by the end of 15 years.

Feel free to ask for any clarification, if required. Kindly provide feedback by thumbs up. It would be highly appreciated. Thank You.