(Bond

valuation)

You are examining three bonds with a par value of

$1 comma 000

(you receive

$1 comma 000

at maturity) and are concerned with what would happen to their market value if interest rates (or the market discount rate) changed. The three bonds are

Bond

Along dash

a

bond with

4

years left to maturity that has an annual coupon interest rate of

12

percent, but the interest is paid semiannually.

Bond

Blong dash

a

bond with

12

years left to maturity that has an annual coupon interest rate of

12

percent, but the interest is paid semiannually.

Bond

Clong dash

a

bond with

19

years left to maturity that has an annual coupon interest rate of

12

percent, but the interest is paid semiannually.

What would be the value of these bonds if the market discount rate were

a.

12

percent per year compounded semiannually?

b.

5

percent per year compounded semiannually?

c.

18

percent per year compounded semiannually?

d. What observations can you make about these results?

a. If the market discount rate were

12

percent per year compounded semiannually, the value of Bond A is

$1000

.

(Round to the nearest cent.)

If the market discount rate were

12

percent per year compounded semiannually, the value of Bond B is

$1000

.

(Round to the nearest cent.)

If the market discount rate were

12

percent per year compounded semiannually, the value of Bond C is

$1000

.

(Round to the nearest cent.)

b. If the market discount rate were

5

percent per year compounded semiannually, the value of Bond A is

$nothing

.

(Round to the nearest cent.)