Question
ABC Corporation has recently issued a 20-year, semi-annual coupon bond with a face value of $5,000. The bond has a coupon rate of 4%. Scenario:
ABC Corporation has recently issued a 20-year, semi-annual coupon bond with a face value of $5,000. The bond has a coupon rate of 4%. Scenario: Current market interest rates for similar-risk bonds have fluctuated. Initially, the market interest rate was 5%, but due to some market changes and policy adjustments, the rates have dropped to 3% and are expected to rise to 6% over the next few years.
8 Questions:
What is the semi-annual coupon payment that the bondholders receive?
Compute the initial price of the bond when the market interest rate was 5%.
Now, recompute the price of the bond given the drop in interest rates to 3%.
Predict the bond price if the market interest rates rise to 6%.
Calculate the Yield to Maturity (YTM) of the bond for each of the above interest rate scenarios (5%, 3%, 6%).
How does the change in market interest rates impact the bond's price and its Yield to Maturity?
Now, let's introduce a twist. Assume that ABC Corporation has a callable feature on the bond which allows them to buy back the bond at $5,200 after 10 years. How would this feature affect the bond's valuation?
If the interest rates dropped to 3% after 10 years, should ABC Corporation call the bond? Why or why not?
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