Market rate of interest on similar bonds is eight percent

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Reference no: EM13721468

Ace Apparel, Inc., a manufacturer, has just issued $1,000,000 principal amount of bonds with a six percent semi annual coupon and a maturity of twenty years. The market rate of interest on similar bonds is eight percent (compounded semi annually)

a. How much did Ace Apparel receive for each $1,000 bond (ignore issue costs)?

b. If the market rate of interest were to increase to ten percent in exactly five years, at what price would the bonds then sell?

c. If you were to purchase a single $1,000 bond at issuance (part a) and then sell it at the market price five years later (part b), what would be your annual rate of return (APR) on this investment (this is called the “Holding Period Yield”)? Ignore transactions costs.

Reference no: EM13721468

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