2009-09-25_092012_dme3

# 2009-09-25_092012_dme3 - (Interest rate risk) Two years ago...

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(Interest rate risk) Two years ago your corporate treasurer purchased for the firm a 20- year bond at its par value of \$1,000. The coupon rate on this security is 8%. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9%. A cash shortage has forced you to instruct your treasurer to liquidate the bond. a. At what price will your bond be sold? Assume annual compounding. Price = n n 1 1- 1 (1+r) [(Coupon Payments ) (Maturity Value )] (1+r) r × + × P = 18 18 1 1 1 (1.09) [(\$80 ) (\$1,000 )] 0.09 (1.09) - × + × = \$912.44 The bond can be sold for \$912.44. This was developed as follows: \$80 x (8.7556) + \$1,000 x (.21199) = \$912.44 P.S. I am also attaching an excel sheet showing how to calculate the price of the bond using excel built-in formula b. What will be the amount of your gain or loss over the original purchase price? \$1,000 - \$912.44

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## This note was uploaded on 04/26/2011 for the course MAC 1106 taught by Professor Petruska during the Spring '08 term at Pensacola Junior College.

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2009-09-25_092012_dme3 - (Interest rate risk) Two years ago...

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