Question

Simon purchases a bond, newly issued by Amalgamated Corporation, for $1000. The bond pays $60 to its holder at the end of the first and second years and pays $1.060 upon its maturity at the end of the third year. a. What are the principal amount the term, the coupon rate, and the coupon payment for Simon's bond? Instructions: Enter your responses as whole numbers Principal amount $ Term: years Coupon rate % Coupon payment $ D b. After receiving the second coupon payment at the end of the second year), Simon decides to sell his bond in the bond market What price can he expect for his bond if the one year interest rate at that time is 3 percent? 8 percent? 10 percent? Instructions: Enter your responses as whole numbers Expected price for the bond at 3 percent SO 8 percent $ 10 percent: S c. Suppose that after two years, the price of Simon's band falls below $1,000, even though the market interest rate equals the coupon rate. One possible reason is that: O bad news arrives about Amalgamated Corporation, leading financial investors to strongly believe that the firm would promptly pay off its debt in one year. Othere is good news about Amalgamated Corporation, leading financial investors to demand more of the company's bands Othere is bad news about Amalgamated Carporation, leading financial investors to fear that the firm might go bankrupt and nat pay off its debt in one year there is a very good chance that a final payment of more than $1,060 will be made, so financial investors will be willing to pay $1,000 for the bond since they know they can eam percent.

Answer 1

Answer :

(a)

* Principal Amount = $1000

* Term = 3 Years

* Coupon Rate = Annual Payment / Par Value

= 60 / 1000 *100

= 0.06*100

= 6

Therefore Coupon rate = 6%

* Coupon Payment = 60$

(b) :

Expected Price for the bond -

Price of the bond after 2nd year = Present value of Future Cash Flows

* At 3%

Price of the bond after 2nd year = 1060 / (1.03)

= $1029.13

*At 8%

Price of the bond after 2nd year = 1060 / (1.08)

= $981.48

*At 10%

Price of the bond after 2nd year = 1060 / (1.1)

= $963.64

Therefore Expected Price for the bond at-

3% = $1029.13

8% = $981.48

10% = $963.64

(C) :

Suppose that after two years the price of simon's bond falls below $1,000 even though the market interest equals the Coupon rate . Hence the Possible is that Inflation , Risk Of Investment , Uncertainity of economy .