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ABC Corporation has recently issued a 20-year, semi-annual coupon bond with a face value of...

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Question

Accounting

ABC Corporation has recently issued a 20-year, semi-annual coupon bond with a face value of $5,000. The bond has a coupon rate of 4%. Scenario: Current market interest rates for similar-risk bonds have fluctuated. Initially, the market interest rate was 5%, but due to some market changes and policy adjustments, the rates have dropped to 3% and are expected to rise to 6% over the next few years.

Questions:

1)What is the semi-annual coupon payment that the bondholders receive?

2)Compute the initial price of the bond when the market interest rate was 5%.

3)Now, recompute the price of the bond given the drop in interest rates to 3%.

4)Predict the bond price if the market interest rates rise to 6%.

5)Calculate the Yield to Maturity (YTM) of the bond for each of the above interest rate scenarios (5%, 3%, 6%).

6)How does the change in market interest rates impact the bond's price and its Yield to Maturity?

7) Now, let's introduce a twist. Assume that ABC Corporation has a callable feature on the bond which allows them to buy back the bond at $5,200 after 10 years. How would this feature affect the bond's valuation?

8)f the interest rates dropped to 3% after 10 years, should ABC Corporation call the bond? Why or why not?

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