Problem: Assume that General Motors Corporation sold an issue of bonds with a 10-year maturity, a $1000 par value, a 10% coupon rate, and semiannual interest payments.
1) Two years after these bonds were issued, the going rate on bonds such as these fell to 6%.
Calculate the price at which these bonds would sell.
2) Assume that 2 years after their initial offering, the going rate for bonds such as these had risen to 12%.
Calculate the price at which these bonds would sell.
3) Assume that the conditions in Part a (above) existed; that is, interest rates fell to 6% two years after their issue date. Assume further, that the interest rate remained at 6% for the next 8 years.
Explain what would happen to the price of these GM bonds over this 8-year time frame.