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Assignment ID: FG133136853
Question – The Time Value of Money – Joseph’s Baseball Bats, Inc. decides to finance an additional plant expansion by borrowing in the bond market. Having learned a lesson from its earlier bond issuance, where the coupon rate was lower than the market rate, they decided to increase the rate offered.
On March 1, 2022, they issued a $6,000,000 face value, 6% coupon rate, 20-year bond. However, this time, the 6% coupon offered is higher than the 5% market rate of interest. The bonds pay interest on February 28th of each year and mature on February 28, 2042.
1. How much cash did Joseph’s Baseball Bats, Inc. receive (i.e., what was the bond’s price)?
2. If, after March 1, 2022, the U.S. Federal Reserve increases interest rates, what will likely happen to the price of Joseph’s bonds in the marketplace? Why will this happen?