Question
There is an example for this question below as well. Please help figure out this first problem set. KIC, Inc., plans to issue $7 million
There is an example for this question below as well. Please help figure out this first problem set.
KIC, Inc., plans to issue $7 million of bonds with a coupon rate of 10 percent and 10 years to maturity. The current market interest rates on these bonds are 9 percent. In one year, the interest rate on the bonds will be either 12 percent or 8 percent with equal probability. Assume investors are risk-neutral. |
a. | If the bonds are noncallable, what is the price of the bonds today? Assume a par value of $1,000 and semiannual payments. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Price of the bonds | $
|
Example Problem Statement: ACME, Inc., plans to issue $8 million of bonds with a coupon rate of 6 percent and 30 years to maturity. The current market interest rates on these bonds are 10 percent. In one year, the interest rate on the bonds will be either 10 percent or 4 percent with equal probability. Assume investors are risk-neutral. a. If the bonds are noncallable, what is the price of the bonds today? Assume a par value of $1,000 and semiannual payments.
Example Solution Set: First using the Excel Functions and using the data from the above problem statement: Using Excel Functions: PMT Int Periods Rates Rise: 30 .06 58 PVA =(Rate,Nper,Pmt) = (.05,58,30) = 564.59; PV =(Rate,Nper,Pmt,[FV]) = (.05,58,,1000) = 59.02; 564.59 + 57.02 = $623.61 Rates Fall: 30 .02 58 PVA =(Rate,Nper,Pmt) = (.02,58,30) = 1024.36; PV =(Rate,Nper,Pmt,[FV]) = (.02,58,,1000) = 317.10; 1024.36 + 317.10 = $1,341.45 P0 = [.50($623.61) + .50($1,341.45)] / 1.0502 + $30 / 1.050 + $30 / 1.0502 P0 = $946.97
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