Suppose that two years after the bonds were issued, the required interest rate fell to 7 percent. What would be the bonds’ value?
To calculate the value of the bonds after the interest rate has fallen to 7 percent, you would need to use the formula for present value of a bond.
The formula for the present value of a bond is:
PV = C / (1 + r)^n + C / (1 + r)^(n-1) + ... + C / (1 + r) + M / (1 + r)^n
Where:
PV = Present value of the bond
C = Coupon payment (annual interest payment)
r = Required interest rate (as a decimal)
n = Number of periods (number of years)
In this case, you need to adjust the interest rate to 7 percent, or 0.07 as a decimal. You also need to consider the number of years that have passed since the bond was issued, which is 2 years.
Substituting the values into the formula, you would calculate the present value of the bond:
PV = C / (1 + r)^n + C / (1 + r)^(n-1) + ... + C / (1 + r) + M / (1 + r)^n
Now you can calculate the present value of the bond using the provided information.