Problem 5-21

Bond Valuation and Changes in Maturity and Required Returns

Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

1. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell? Round the answer to the nearest cent.
2. $
4. Suppose that 2 years after the initial offering, the going interest rate had risen to 13%. At what price would the bonds sell? Round the answer to the nearest cent.
5. $
7. Suppose that 2 years after the issue date (as in Part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?
8. I.The price of the bond will rise, approaching $1,000 at the maturity date.
9. II.The price of the bond will decline, approaching $1,000 at the maturity date.
10. III.The price of the bond will remain the same.
11. -Select-
12. I
13. II
14. III
15. Item 3