Exxon sold an issue of bonds with a $1000 par value, 15-year maturity, a 12% coupon rate, and semiannual interest payments.
Question 1. 3 years after the issue, the going rate on the bonds dropped to 5%. What steps would you take to determine the price at which these bonds would sell.
Question 2. Assume that 2 years after the initial offering, the rate for the bonds rose to 14%. Calculate the selling price of the bonds.
Question 3. Assume that the conditions in 1 existed - that is, interest rates fell to 5% 3 years after their issue date. Also assume that the interest rate remained at 6% for the next 12 years.
Explain what would happen to the price of the bonds over this 12-year time frame.