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A General Power bond carries a coupon rate of 8.9%, has 9 years until maturity, and...

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Finance

A General Power bond carries a coupon rate of 8.9%, has 9 yearsuntil maturity, and sells at a yield to maturity of 7.9%. (Assumeannual interest payments.)

a. What interest payments do bondholders receive each year?

b. At what price does the bond sell? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)

c. What will happen to the bond price if the yield to maturityfalls to 6.9%? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)

Answer & Explanation Solved by verified expert
4.3 Ratings (891 Votes)

a. Interest received = coupon rate*par value = 8.9*1000/100=89

b.

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =9
Bond Price =? [(8.9*1000/100)/(1 + 7.9/100)^k]     +   1000/(1 + 7.9/100)^9
                   k=1
Bond Price = 1062.73

c.

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =9
Bond Price =? [(8.9*1000/100)/(1 + 6.9/100)^k]     +   1000/(1 + 6.9/100)^9
                   k=1
Bond Price = 1130.86

BOnd price increased by 1130.86-1062.73=68.13
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Transcribed Image Text

A General Power bond carries a coupon rate of 8.9%, has 9 yearsuntil maturity, and sells at a yield to maturity of 7.9%. (Assumeannual interest payments.)a. What interest payments do bondholders receive each year?b. At what price does the bond sell? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)c. What will happen to the bond price if the yield to maturityfalls to 6.9%? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)

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