Question

Suppose that five years ago Cisco Systems sold a 15-year bond issue that had a $1,000...

Suppose that five years ago Cisco Systems sold a 15-year bond issue that had a $1,000 par value and a 7 percent coupon rate. Interest is paid semiannually.
a. If the going interest rate has risen to a 10 percent, at what price would the bonds be selling today?
b. Suppose that the interest rate remained at 10 percent for the next 10 years. What would happen to the price of Cisco’s bonds over time?
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Answer #1

a.

A 15 year maturity bond sold five year Ago, so number of year remains in maturity is 10%.

Current interest rate = 10%

So, Price of bond today is calculated in excel and screen shot provided below:

Price of bond is $813.07.

b.

Currently bond is trading at discount. if interest rate remained at 10 percent for the next 10 years, then price of bond increase and move towards Par value that is $1,000.

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