Question

For all questions, assume a par value is $1,000 and semiannual bond interest payments.

Suppose Bay Path actually offers a coupon rate of 6% on its twenty-year bonds, expecting to sell the bonds at par. What will happen to the price of a single bond with a par value of $1,000 if the required bond yield unexpectedly falls to 5% or rises to 7%?

How much money will Bay Path realize from its $50 million bond issue if the actual yield is either 5% or 7%? Hint: Refer to your answers to Question 4, and ignore selling costs.

Answer 1

Solution :

Computation of bond price - If yield is 5%
Table values are based on:
n=	40
i=	2.50%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.37243	$50,000,000	$18,621,531
Interest (Annuity)	25.10278	$1,500,000	$37,654,163
Money realized from issue of bond			$56,275,694

Computation of bond price - If yield is 7%
Table values are based on:
n=	40
i=	3.50%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.25257	$50,000,000	$12,628,623
Interest (Annuity)	21.35507	$1,500,000	$32,032,609
Money realized from issue of bond			$44,661,232