Question

Blackaby plc issued a bond with a par value of $1 000 in September 2012, redeemable in September 2018 at par.The coupon is 8% payable annually in September –first payment in 2013

1. Calculate the price investors will pay for this bond at the time of issue if the market rate of interest for a security in this risk class is 7%
2. Compute the bonds value in the secondary market in September 2015 if interest rates rise by 200 basis points between 2012 and 2015

Answer 1

	The price that the investors will pay at the time of issue = 1000/1.07^6+80*(1.07^6-1)/(0.07*1.07^6) =	$        1,047.67
ii]	The value in the secondary market, as of Sept 2015,
	will the PV expected cash flows for the remaining 3
	years.
	The market interest rates have risen by 200 basis
	points to become 7%+2% = 9%. So, the discounting is
	to be done at 9%.
	Value of bonds at 9/2015 = 1000/1.09^3+80*(1.09^3-1)/(0.09*1.09^3) =	$ 974.69