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3. The Hawk Corp. has a 6 percent coupon bond outstanding. The Dove Corp. has a 14 percent coupon bond outstanding. Both bonds make semi-annual
3. The Hawk Corp. has a 6 percent coupon bond outstanding. The Dove Corp. has a 14 percent coupon bond outstanding. Both bonds make semi-annual coupon payments, and mature in 10 years. The par value of the Hawk Corp. bond is $1,000. The par value of the Dove Corp. bond is $500. a) Calculate the price of each bond assuming they are priced to provide a yield to maturity (ytm) of 10 percent. b) Interest rates suddenly change and the ytm of each bond rises by 4 percent. Calculate the new price of each bond. c) What does this problem tell you about the interest rate risk of lower coupon bonds (provide quantitative justification for your answer)? 4. An investment pays $1,000 every 3rd year, forever, beginning one year from today (so the cash flows occur at t=1,4,7,) a) What is the value (today) of this investment if the appropriate discount rate is 8% per year (compounded annually)? b) What is the value (today) of this investment if the appropriate discount rate is 8% per year (compounded semi-annually)? c) What is the value (today) of this investment if the appropriate discount rate is 8% per year (compounded quarterly)
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