What would be a fair price for these bonds

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Question - XYZ in South Africa decides to issue 15-year bonds with a face value of 10,000 Rand and semi-annual coupon payments. The effective annual rate or yield on other commercial and industrial bonds of similar risk is 6%. The company decides to offer 4% annual coupon in case of liquidity constraints that may arise.  Show workings.

a. What would be a fair price for these bonds?

b. Imagine that 4 years after issue, the general level of interest rates in the South African economy has moved to such an extent that the value of the Woolworths Inc bond has shifted exactly 10,000 Rand. 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 sometimes called the Quoted Interest Rate)?

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

Reference no: EM133047243

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