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Bond Valuation and Changes in Maturity and Required Returns Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value,

Bond Valuation and Changes in Maturity and Required Returns

Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

  1. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 7%. At what price would the bonds sell? Round your answer to the nearest cent.

$

  1. Suppose that 2 years after the initial offering, the going interest rate had risen to 15%. At what price would the bonds sell? Round your answer to the nearest cent.

$

  1. Suppose that 2 years after the issue date (as in Part a) interest rates fell to 7%. Suppose further that the interest rate remained at 7% for the next 8 years. What would happen to the price of the bonds over time?

I. The price of the bond will decline, approaching $1,000 at the maturity date. II. The price of the bond will remain the same. III. The price of the bond will rise, approaching $1,000 at the maturity date.

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