Question 1

State Inc. decides to issue 10% annual coupon bonds with a maturity of 20 years.

a.) Using $1,000 as the face value, what should you pay for this bond if the yield to maturity is 12%? If 10%? If 8%? If 6%. Explain the results.

b.) Instead of a 20 year bond, they decide to issues 5-years bonds. What should you pay for this bond if the yield to maturity is 12%, 10%, 8% and 6%? Explain the differences in prices changes for (3a) and (3b) in terms of maturity.

c.) Instead, they decide to borrow $50 million from a bank with a maturity of 5 years. If the interest rate is 8%, what is the monthly payment? What is the balance at the end of 28 months?

d.) Explain how the real rate and inflation rate is related to the nominal rate. What does the real rate represent?