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Attempts: Keep the Highest: 13 5. Calculating the bond price ReNew Corporation raises funds to build renewable energy systems

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Answer #1

Face Value = $1,600

Annual Coupon Rate = 6.00%
Annual Coupon = 6.00% * $1,600
Annual Coupon = $96

Time to Maturity = 3 years

Answer a.

Market Interest Rate = 6.00%

Price of Bond = $96 * PVIFA(6.00%, 3) + $1,600 * PVIF(6.00%, 3)
Price of Bond = $96 * (1 - (1/1.06)^3) / 0.06 + $1,600 / 1.06^3
Price of Bond = $1,600

The price of each of these bonds is $1,600 which means that the bonds sell at par.

Answer b.

Market Interest Rate = 7.00%

Price of Bond = $96 * PVIFA(7.00%, 3) + $1,600 * PVIF(7.00%, 3)
Price of Bond = $96 * (1 - (1/1.07)^3) / 0.07 + $1,600 / 1.07^3
Price of Bond = $1,558.01

The price of the ReNew bond changes to $1,558.01, which means that it sells at discount.

Answer c.

Market Interest Rate = 4.00%

Price of Bond = $96 * PVIFA(4.00%, 3) + $1,600 * PVIF(4.00%, 3)
Price of Bond = $96 * (1 - (1/1.04)^3) / 0.04 + $1,600 / 1.04^3
Price of Bond = $1,688.80

The new price of the bonds changes to $1,688.80, which means that the bond sells at premium.

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