Two years ago, Decathlon Groups corporate treasurer purchased for the firm a 30-year bond at its par
Question:
Two years ago, Decathlon Group’s corporate treasurer purchased for the firm a 30-year bond at its par value of $1,000. The coupon rate on this security is 9 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 10 percent. A cash shortage has forced the corporate treasurer to liquidate the bond.
a. At what price will the bond be sold? Assume annual compounding.
b. What will be the amount of the gain or loss over the original purchase price?
c. What would be the amount of the gain or loss had the corporate treasurer originally purchased a bond of 5-year rather than 30-year maturity? (Assume all characteristics of the bonds are identical except their maturity periods.)
d. What do we call this type of risk assumed by the firm’s corporate treasurer?
Step by Step Answer:
Foundations Of Finance
ISBN: 9781292318738
10th Global Edition
Authors: Arthur Keown, John Martin, J. Petty