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A large industry bond carries a coupon rate of 7% and has a face value of $1000
A large industry bond carries a coupon rate of 7% and has a face value of $1000. The bond has 12 years until maturity and sells at a yield to maturity of 6%.
a) What interest payments do the bondholders receive each year?
b) At what price does the bond sell assuming annual interest payment?
c) What will happen to the bond price if the yield to maturity falls to 3%?
Expert Solution
1.
Annual interest payment=Par value*Coupon rate
=1000*7%=70
2.
Price=Par value*Coupon rate/yield*(1-1/(1+yield)^n)+Par value/(1+yield)^n
=1000*7%/6%*(1-1/1.06^12)+1000/1.06^12=1083.83843940383
3.
=1000*7%/3%*(1-1/1.03^12)+1000/1.03^12=1398.1601597427
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