Face Rate vs. Market Rate

1. A note from Exhau Corp. will mature and pay $10,000 in three years. The note pays 5% interest in the end of every year. The current market interest rate for similar bond is 4%. What price is this note selling for today?? Use the Method 2 on to answer this question.

2. A note from Exhau Corp. will mature and pay $10,000 in three years. The note pays 5% interest in the end of every year. The current market interest rate for similar bond is 5%. What price is this note selling for today?? Use the Method 3 to answer this question.

3. A note from Exhau Corp. will mature and pay $10,000 in three years. The note pays 5% interest in the end of every year. The current market interest rate for similar bond is 6%. What price is this note selling for today?? Use the Method 4 to answer this question.

A little example to answer question 1,2,3: Bigelow Corp. lends Scandinavian Imports $10,000 in exchange for a $10,000, three-year note bearing interest at 10% annually. The market rate of interest for a note of similar risk is also 10%. How does Bigelow record the receipt of the note?. This note has three interest payments of $1,000 in the end of the 1st, 2nd, and 3rd year and a principal payment in the end of the 3rd year

Method 2 Four future cash flows using PV function =PV(0.1,1, 0,-1000)+PV(0.1,2, 0,-1000)+PV(0.1,3, 0,-1000)+PV(0.1,3, 0,-10000) =$10,000 Method 3 One ordinary annuity with one single sum by adding up two PV functions =PV(0.1,3,-1000)+PV(0.1,3,,-10000) =$10,000 Method 4 One ordinary annuity with one single sum by using one PV function =PV(0.1,3,-1000,-10000) =$10,000

4.Higher market interest rates lead to _________ (higher/lower) selling price of a bond

5.When market rate > face rate, selling price _____ (>,=,<) face value Issuance at ________ (Premium/ Par/ Discount)

6.When market rate = face rate, selling price _____ (>,=,<) face value Issuance at ________ (Premium/ Par/ Discount)

7.When market rate < face rate, selling price _____ (>,=,<) face value Issuance at ________ (Premium/ Par/ Discount)