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Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 6 percent,...

Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 6 percent, a par value of $1,000, semiannual coupons, and 20 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 8 percent or 4 percent with equal probability. Assume investors are risk-neutral.

  

a.

If the bonds are noncallable, what is the price of the bonds today?
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Answer #1

Price of the bond today = ($70 x 9.12855) + ($1000 x 0.17843)

= 638.9985 + 178.43

= $817.4285

where,

(1)

Coupon rate = 7%

annual coupon payment = $1000 x 7% = $70

face value = $1000

(2)

Market interest rate = 9%

Time period = 20

Therefore,

PVF(9%, 20) = 0.17843

PVAF(9%, 20) = 9.12855

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