Question
Victorian Shipping Corporation (VSC) decided to increase the company ship's fleet a year ago To finance this decision the company management has decided to issue
Victorian Shipping Corporation (VSC) decided to increase the company ship's fleet a year ago To finance this decision the company management has decided to issue bonds. Last year, the yield on AAA-rated corporate bonds averaged approximately 5 per cent; one year later, the yield on these same bonds had climbed to about 6 per cent because the Reserve Bank of Australia increased interest rates during the year. Under these circumstances VSC issued a 10-year, 5 per cent coupon $1000 bond one year ago (on 1 January). The bond interest pays annually. Assume that the market rate on similar risk bonds was 5 per cent at the time the bonds were issued.
- Compute the market value of the bond at the time of issue.
- Compute the market value of the bond one year after issue if the market yield for similar risk bonds was 6 per cent.
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