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The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a...

The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 9.925 percent. The current market rate for similar securities is 11.6 percent. Assume that the face value of the bond is $1,000. (a) What is the current market value of one of these bonds? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answer to 2 decimal places, e.g. 15.25.) Current market value $ (b) What will be the bond’s price if rates in the market (i) decrease to 9.60 percent or (ii) increase to 12.6 percent? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answers to 2 decimal places, e.g. 15.25.) Bond's price (i) Decrease to 9.60 percent $ (ii) Increase to 12.6 percent $ (c) How do the interest rate changes affect premium bonds and discount bonds? Bonds, in general, in price when interest rates go up. When interest rates decrease, bond prices . (d) Suppose the bond were to mature in 12 years. What will be the bond’s price if rates in the market (i) decrease to 9.60 percent or (ii) increase to 12.6 percent? (Round intermediate calculations to 2 decimal places, e.g. 1.25 and final answers to 2 decimal places, e.g. 15.25.) (i) Bond's price if rate decrease to 9.60 percent $ (ii) Bond's price if rate increase to 12.6 percent $

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Answer #1

Price of Bond = C/2 * {(1 - (1+r/2)^(-2t))/(r/2)} + F/(1+r/2)^2t

where C is coupon , r is yield rate & F is face value of bond

Ans a) Current market value of bond = $864.22

Ans b) Price of bond at yield rate of 9.6% = $1030.61

Price of bond at yield rate of 12.6% = $797.71

Ans c) If interest rate increase then value of bond will decrease and when interest rate decrease then value of bond will incrase.

When Interest rate increase:

Value of premium bond will decrease

Value of discount bond will decrease further

When Interest rate decreases:

Value of premium bond will increase further

Value of discount bond will increase.

Ans d) Value of bond which maturing in 12 year at 12.6% = $836.69

Value of bond which maturing in 12 year at 9.6% = $1022.87

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