Question
Mercury Pty Ltd has issued 25-year bonds that pay semiannual coupons at a rate of 8.5 per cent. The current market rate for similar securities
Mercury Pty Ltd has issued 25-year bonds that pay semiannual coupons at a rate of 8.5 per cent. The current market rate for similar securities is 10 per cent. Assume the bond has a face value of $1000.
a. What is the bond's current market value?
b. What will be the bond's price if rates in the market decrease to 9 per cent?
c. Refer to your answers in part b. How does the interest rate change affect the bond price?
d. Suppose the bonds were to mature in 15 years. How does the interest rate change in part b affect the bond prices? Explain. (Tip: refer to the bond theorems. No calculation needed) (2 marks)
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