Question

Assets, Inc., plans to issue $7 million of bonds with a coupon rate of 10 percent, a par value of $1,000, semiannual coupons, and 15 years to maturity. The current market interest rate on these bonds is 9 percent. In one year, the interest rate on the bonds will be either 12 percent or 6 percent with equal probability. Assume investors are risk-neutral.

  

a.	If the bonds are noncallable, what is the price of the bonds today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

    

Answer 1

Basically the price can be calculated using the following equation:

Now as the coupon rate can be two different values with equal probability, we first need to calculae the Price for each of the two coupon rates:

Now as the probability is 50% for each of the two scenarios: The price = 0.5 x 755.67 + 0.5 x 1,244.33 = 1,000.00