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Suppose that five years ago MRT Limited sold a 20 -year bond issue that had a...

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?
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Answer #1

Current price =$769.41 calculated using PV function of Excel as follows:

If the interest rate remained at 10%, price will gradually increase over time till maturity and will become equal to face value (par value) on the date of maturity.

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