Question

1.What happens to the price of a six-year bond with an 8% coupon when interest rates...

1.What happens to the price of a six-year bond with an 8% coupon when interest rates change from 9% to 8%?

2.What is the NPV of a project that costs $285,000 today and no cash inflows for 3 years, followed by cash inflows $95,000 annually for the next five years, if the opportunity cost of capital is 2%?

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Answer #1

1. The price if the bond changes by :

The price of the bond when the interest rate is 9% is :

FV = $1000

PMT = 8% * 1000

= $80

N = 6 YEARS

I/Y = 9%

The present value of bond is = $955.1408

When the interest rate is 8%, the PV is

= $1000

So, the price of the bond increases by ( $1000 - $955.1408 = $44.8592)

=$44.86 (rounded off to two decimal places)

2. CF0 = ($285,000)

CF1 = $0

CF2= $0

CF3= $0

CF4 = $95,000

FO4  = 5

I/Y = 2%

THE NPV IS = $136951.8259

= $136951.82

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