Question - Market Yield Rates and Bond Values
Smith & Company issued $80 million maturity value of 5-year bonds, which carried a coupon rate of 6%, with interest paid semiannually.
At the time of the debt offering, equivalent risk-rated bonds were yielding 8%.
One year after the 5-year bond offering, yield rates had risen to 10%; but, by the second anniversary of the bond sale, the yield rate on similarly risk-rated debt instruments had dropped to only 4%.
Calculate the proceeds from the sale of the 6%, 5-year bonds.
Calculate the book value of the bonds after 1 year and after 2 years.
Calculate the market value of the bonds after one year and after two years.
What is the relationship between market yield rates and bond values?