a. Middleton expects to buy a 9.5% coupon, 15 years bond today, when it is first issued by Alex
PLC. If interest rates suddenly rise to 12.5%, what happens to the value of Middleton’s bond?
Why? (Word limit 20 – 30 words) (3 Marks)
b. A corporate bond has a face value of $1 000, a coupon rate of interest of 10.5% per annum,
payable semi-annually, and 20 years remaining to maturity. The market interest rate for bonds
of similar risk and maturity is currently 8.5% per annum.
Required:
i. What is the coupon payment of the bond? (1 mark)
ii. What is the present value of the bond? (3 marks)
iii. If the coupon payment is payable annual (based on the same information), what is
the value of the bond?