(Bond

valuationlong dashzero

coupon)

The Latham Corporation is planning on issuing bonds that pay no interest but can be converted into

$1,000at maturity, 7 years from their purchase. To price these bonds competitively with other bonds of equal risk, it is determined that they should yield 6 percent, compounded annually. At what price should the Latham Corporation sell these bonds?

The price of the Latham Corporation bonds should be$

(Bond

valuation)

You are examining three bonds with a par value of

$1,000

(you receive

$1,000

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 dasha

bond with 6 years left to maturity that has an annual coupon interest rate of

11percent, but the interest is paid semiannually.

Blong dasha

bond with

9 years left to maturity that has an annual coupon interest rate of 11

percent, but the interest is paid semiannually.

Bond

Clong dasha

bond with

15

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

11 percent, but the interest is paid semiannually.

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

a.

11

percent per year compounded semiannually?

b.

5

percent per year compounded semiannually?

c.

17

percent per year compounded semiannually?

d. What observations can you make about these results?