Suppose Ford Motor Company sold an issue of bonds with a 20-year maturity, a $1,000 par value, a 10 percent coupon rate, and semi-annual interest payments

Finance Dec 01, 2020

Suppose Ford Motor Company sold an issue of bonds with a 20-year maturity, a $1,000 par value, a 10 percent coupon rate, and semi-annual interest payments. Make sure to show your work without excel. A)Suppose that, two years after the initial offering, the going interest rate on bonds such as these rose to 14 percent. At what price will the bonds sell?

Expert Solution

Bond Price = $\sum$ [C_n/ (1 + YTM)ⁿ] + [P/ (1+ i)ⁿ]

C_n = Coupon Payment = 10%

YTM = Interest Rate = 14%

P = Par value of bond = $1000

n = Number of periods = 20 years

Bond price = [0.10/ (1+ 0.14)²⁰ ] + [1000/ (1+ 0.14)²⁰]

= [0.10/ (1.14)²⁰] + [1000/ (1.14)²⁰]

= [0.10/ 13.74] + [1000/ 13.74]

= 0.0073 + 72.780

= 72.78 (or) 73 (rounded off)

Bond Price = $73

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