Homework Answers
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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