Alibaba Company Limited sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10 percent coupon rate, and semiannual interest payments.
a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6 percent. At what price would the bonds sell?
b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12 percent. At what price would the bonds sell?
c. Suppose the condition in part a existed. Further assume that the interest rate remained at 6 percent for the next 8 years. What would happen to the price of the bonds over time?