Please answer Q # 6

1. Suppose Galaxy Corp. has a bond issue [$1,000 face value) that pays a coupon of 4% per year. The bond matures in 20 years. What is the value of the bond?

P = 40(13.59)+1000(0.456)=$999.6

2. Now, suppose in the second year. (how many years to maturity?), interest rates on a similar type of bond increases to 5%. What is the value of the bond?

Po =40(12.085)+1000(0.396)=$879.4

3. Next, after another year, with the market rate still at 5%, what will be the value of the bond?

P=40(11.69)+1000(0.416)=$883.6

4. Calculate the one-year holding period return between 2 and 3?

5. . Going back to the scenario in #1 above, suppose the interest rates fall to 3% the year after Galaxy bonds were issued. What would this do to the value (Po) of Galaxy's bonds?

P=40(14.324)+1000(0.57)=$1142.96

6. Wabel Crop. Issues bonds with a 7% Coupon paying interest semiannually. If the going rate in the market is 6%, what is the value of this 15-year bond now?