223.3

3. Several major companies (like Disney and AT&T) have issued "Century Bonds." These bonds pay regular semi-annual coupons, but do not mature until 100 years after they are issued. Some critics have stated that there is huge risk that you won't get the principal repaid because you just can't predict what will happen to the company in 100 years. For this question assume that the company has just issued a $1000 par, 8% coupon bond with semi-annual payments.
 

1. If current market rates are 8% compounded semi-annually, what is the current price of the bond? What is the present value of the principal repayment at maturity? Finally, what proportion of the bond's price does the principal repayment make-up? (5 pts.)
   
2. What is the total value today of the last 40 years (years 61-100) of payments, including coupons and principal repayment? (8 pts.)
   
3. If interest rates go down, will the bond be worth more or less? Why? (4 pts.)
   
4. If interest rates go down, will the principal repayment be a larger or smaller portion of the total value of the bond? Why? (6 pts.)

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