Question

a. Whale Watching Limited issued 14-year bonds one year ago at a coupon rate of 6.9 percent. The bonds have a face value of $200 000 and make semi-annual payments. If the YTM on these bonds is 5.5 percent, what is the current bond price?

b. If you expect the future inflation rate is low in next 3 years, what characteristics of the straight bond will have a better performance?

Answer 1

a. Since nothing is mentioned , calculating on excel or financial calculator:

Current price = $225,763.16

NPER	26	[13years *2]
FV	200000
PMT	6900.0	[200,000*6.9%*1/2]
Rate	2.75%	[5.5%/2]
PV	$225,763.16	[-pv(rate,nper,pmt,fv,0)

b. In case of deflation i.e. the inflation being lower than usual, the straight bond holder wins since these bonds pay interest that were fixed during the inflation time. In this case, the bondholder will have more money in the form of interest received when compared to current debt securities.

b.