Question #3 (15 marks)

The Churchill Company issued a 25-year bond five years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate. Required: Show all calculations a. What is the bond's price today if the coupon rate on comparable new issues is 12%? (5marks) b. What is the price today if the coupon rate on comparable bonds declines to 8%? (5 marks) c. Explain the results of parts a) and b) in terms of opportunities available to investors. Specifically, comment on the relationship between coupon rates on newly issued bonds and the coupon of the existing bond.