Kemco Manufacturing Co. has a bond of $1000 par value outstanding. It pays interest annually and carries an annual coupon rate of 8%.
Bonds are issued 2 years ago & due in 10 years. If the market rate of return on bonds is 7%. Required:
a. What is the current price of the bond? Explain whether the bond will sell at a discount or a premium?
b. Would the price of the bond be any different if interest was paid semi-annually instead of annually? Explain?
c. Explain what would happen to the bond price 5 years from now if the market interest rate remained the same at 7%. Explain what would be the market value of the bond at maturity date.