A company can raise money for a project by selling bonds. A typical bond has a face value of $1,000 and a 30-year life. The company will pay interest on the bond at the end of each year, and at the end of 30 years it will also redeem the bond (i.e., pay back the original $1,000). The interest rate is determined by market forces. What is the NPVof a 30-year bond paying 6% interest to someone with a discount rate of 6%? To someone with a discount rate of 5%? To someone with a discount rate of 7%?
NOTE: This question can be answered by creating a spreadsheet and showing the interest of $60 received at the end of years 1 to 30 and the return of the $1,000 at the end of year 30. Discount all of these payments using the investor’s discount rate, and sum to get the NPV of the bond to each investor.