Hargrave Limited is selling a new bond to raise money for their factory in Indonesia. The bond has a face value of $100,000 and will pay a coupon rate of 8.25% p.a. Coupon payments will be made on June 30 and December 31 of each year. The date of the bond is January 1, 2014 and it matures on December 31, 2019. By the time the bond is offered to investors on January 1, 2014, the market interest rate has increased to 11.5% p.a. How much would be willing to pay for this bond.

b. How much would you pay for the bond (in part a.), if the market interest rate on January 1, 2014 is 6% p.a.

Compare your answers from part a. and part b. above with the face value of $100,000 and explain why the bond value is more (or less) than the face value. Your answer should not exceed 200 words.

Hargrave Ltd has just paid a dividend of $2.00 per share on its stock. The dividends are expected to grow at a constant 9% p.a. indefinitely. Calculate the current price if investors require a 14% p.a. return on Hargrave stock. What will the price be in 3 years? In 15 years?