What would be a fair price for these bonds

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Reference no: EM132050507

A) Powerful Chemicals Inc., an industrial company in the USA, decides to issue 20-year bonds with a face value of $1000 and semi-annual coupon payments. The effective annual rate or yield on other commercial and industrial bonds of similar risk and time to maturity is 7.25%, so the company decides to offer 8% annual coupon to attract investors. What would be a fair price for these bonds? Show all workings.

B) This question follows on from part A above.

Imagine that immediately after issue, the general level of interest rates in the U.S. economy moves to such an extent that the value of the Powerful Chemicals bond shifts to exactly $1000. What would now be the new bond-equivalent yield (the one that will be advertised in the financial press as an annual rate and is variously called Nominal Interest Rate, Quoted Interest Rate or sometimes just yield or interest rate)?

C) What would now be the new effective annual yield or rate (EAY or EAR)?

Reference no: EM132050507

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