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5. Calculating the bond price ReNew Corporation raises funds to build renewable energy systems by issuing...

5. Calculating the bond price

ReNew Corporation raises funds to build renewable energy systems by issuing 3-year bonds with a coupon rate of 6% and a face value of $1,600. Assume that the market interest rate for a 3-year bond issued by a firm like ReNew is currently the same as the coupon rate. The price of each of these bonds is____ , which means that the bonds sell at ___

Suppose that the market interest rate for bonds that are similar to the ReNew bond has increased to 7%. The price of the ReNew bond changes to____ , which means that it sells at ____.

Suppose that instead of rising, the market rate decreases from 6% to 4%. The new price of the bond changes to ___, which means that the bond sells at ___.

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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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