Answer:To calculate the price at which the bonds would sell two years after issuance when the going rate of interest fell to 6 percent, you can use the concept of bond valuation. The price of a bond is the present value of its future cash flows, which include coupon payments and the final repayment of the principal.
Here's how you can calculate the price of the bonds:
1. **Calculate the Remaining Number of Coupon Payments:**
Since two years have already passed, there are 10 years remaining until maturity. With semiannual payments, this is equivalent to 20 coupon periods.
2. **Calculate the Coupon Payment:**
The coupon payment is 10% of the Rs 1,000 par value, which is Rs 100.
3. **Determine the Discount Rate (Yield to Maturity):**
The discount rate (yield to maturity) is now 6%, as the going rate of interest has fallen to 6%.
4. **Calculate the Present Value of Coupons:**
For each of the 20 remaining coupon periods, calculate the present value of the coupon payment using the formula:
\[PV = \frac{C}{(1 + r)^n}\]
Where:
- \(PV\) = Present value of coupon payment
- \(C\) = Coupon payment amount
- \(r\) = Discount rate (yield to maturity)
- \(n\) = Number of periods
Sum up the present values of all 20 coupon payments.
5. **Calculate the Present Value of the Principal Repayment:**
Calculate the present value of the principal repayment (par value) using the formula:
\[PV = \frac{F}{(1 + r)^n}\]
Where:
- \(F\) = Par value (Rs 1,000)
6. **Calculate the Total Present Value:**
Sum up the present values of coupon payments and the present value of the principal repayment.
The total present value will be the price at which the bonds would sell two years after issuance at a 6% interest rate.
Please note that bond valuation calculations may also take into consideration factors like compounding frequency, day count conventions, and other market conditions. The calculations provided above offer a simplified overview of the process.
Step-by-step explanation: