Suppose Hillard Manufacturing sold an issue of bonds with a 10-yearmaturity, a $1,000 par value, a 10% coupon rate, and semiannual interestpayments.a. Two years after the bonds were issued, the going rate of interest on bondssuch as these fell to 6%. At what price would the bonds sell?b. Suppose that 2 years after the initial offering, the going interest rate hadrisen to 12%. At what price would the bonds sell?c. Suppose that 2 years after the issue date (as in Part a) interest rates fell to6%. Suppose further that the interest rate remained at 6% for the next 8years. What would happen to the price of the bonds over time?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Suppose Hillard Manufacturing sold an issue of bonds with a 10-year
maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest
payments.
a. Two years after the bonds were issued, the going rate of interest on bonds
such as these fell to 6%. At what price would the bonds sell?
b. Suppose that 2 years after the initial offering, the going interest rate had
risen to 12%. At what price would the bonds sell?
c. Suppose that 2 years after the issue date (as in Part a) interest rates fell to
6%. Suppose further that the interest rate remained at 6% for the next 8
years. What would happen to the price of the bonds over time?
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