FIN 620 Session 3 Homework Assignment Answers_092810

# FIN 620 Session 3 Homework Assignment Answers_092810 - FIN...

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FIN 620 Session 3 Homework Assignment Answers: Session 3: Do problems 15-8, 15-12 8. If interest rates rise, the price of the bonds will fall. If the price of the bonds is low, the company will not call them. The firm would be foolish to pay the call price for something worth less than the call price. In this case, the bondholders will receive the coupon payment, C, plus the present value of the remaining payments. So, if interest rates rise, the price of the bonds in one year will be: P 1 = C + C / 0.13 If interest rates fall, the assumption is that the bonds will be called. In this case, the bondholders will receive the call price, plus the coupon payment, C. So, the price of the bonds if interest rates fall will be: P 1 = \$1,250 + C The selling price today of the bonds is the PV of the expected payoffs to the bondholders. To find the coupon rate, we can set the desired issue price equal to present value of the expected value of end of year payoffs, and solve for C. Doing so, we find:

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## This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Fall '09 term at UMBC.

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FIN 620 Session 3 Homework Assignment Answers_092810 - FIN...

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