A new company issues $10 Million Dollars of 10-year bonds bearing a 4.5% Coupon.   

• If the market demands a 5.0% rate of return for the risk it believes it is taking, how much will the company receive for its bonds?  (In other words, what is the present value of the bond if the desired Yield is 5.0%?  Remember that the value of the Bond is the sum of the present value of the coupons and the present value of the lump sum to be received at maturity.)

 

• It is now three (3) years - 6 semi-annual periods - later.  In other words, there are 7 years (14 semi-annual periods) remaining in the life of the bonds.  The company is thriving and in view of the firm's improved safety the market is satisfied that an appropriate Yield for these bonds is now 4.0%.  If you owned a $1000 bond, how much could you sell it for? (Hint: Determine the value of the bond on the basis of what it is now - a $1000, 7-year bond, paying 4.5%.