The government issued a 15 year bond offering an interest rate of 12 per cent 10 years ago. Since then interest rates have fallen sharply. The bond now has five years to run to maturity and the government has just issued a five year bond offering an interest rate of 6 per cent. Determine a value for the bond that has five years to run to maturity, assume the bond has a face value of £100 and interest is paid annually. Explain your answer.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 10P
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The government issued a 15 year bond offering an interest rate of 12 per cent 10 years ago. Since then interest rates have fallen sharply. The bond now has five years to run to maturity and the government has just issued a five year bond offering an interest rate of 6 per cent. Determine a value for the bond that has five years to run to maturity, assume the bond has a face value of £100 and interest is paid annually. Explain your answer.

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