Question

KIC, Inc., plans to issue $6 million of bonds with a coupon rate of 9 percent and 15 years to maturity. The current market interest rates on these bonds are 8 percent. In one year, the interest rate on the bonds will be either 12 percent or 8 percent with equal probability. Assume investors are risk-neutral. a. If the bonds are noncallable, what is the price of the bonds today? Assume a par value of $1,000 and semiannual payments. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price of the bonds $ b. If the bonds are callable one year from today at $1,060, will their price be greater or less than the price you computed in part a? Less than Greater than

Answer 1

B А 1 a) 2 Bond price in 1 year at 12% 3 Bond price in 1 year at 8% 4 5 Price of the bonds 798.91 =PV(12%/2,14*2,90/2, 1000)*-1 1,083.32 =PV(8%/2,14*2,90/2,1000)*-1 $ $ 870.11 =(798.91*0.5+1083.32*0.5)/(1+4%)^2 6 7 b) Lesser 8 (Only when price exceeds callabe value, bonds will be called)

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