Question

Robertsons, Inc., is planning to expand its specialty stores into five other states and finance the expansion by issuing 15-year zero coupon bonds with a face value of $1,000. If your opportunity cost is 8 percent and similar bonds pay coupons semiannually, what will be the price at which you will be willing to purchase these bonds? (Round your answer to the nearest dollar.)

A) $308
B) $383
C) $803
D) $866

Answer 1

When interest rates increase, the price of existing bonds decreases. In this case, you would be willing to pay approximately $8,273 for the bond.

Step-by-step explanation:

When interest rates increase, the price of existing bonds decreases. Therefore, given the change in interest rates from 6% to 9%, you would expect to pay less than $10,000 for the bond.

To calculate the price you would be willing to pay, you can use the bond pricing formula:

Price = Future Cash Flows / (1 + Yield)^Number of Periods

In this case, you will receive $1,000 at the end of the ten years, and the yield, or interest rate, is now 9%. Since you are buying the bond one year before maturity, the number of periods is 9.

Using the formula, the price you would be willing to pay for the bond is approximately $8,273.