6.6 Explain why bond prices and interest rates are negatively related. What is the role of the coupon rate and term-to-maturity in this relationship?

6.7 If rates are expected to increase, should investors look to long-term bonds or short-term securities? Explain.

Questions and Problems

6.7 Zero coupon bonds: 10-year zero coupon bonds issued by the Queensland Treasury have a face value of $1000 and interest is compounded semi-annually. If similar bonds in the market yield 11.32 per cent, what is the value of these bonds?

6.14 Bond price: Pacific Brands Ltd issued 10-year bonds 4 years ago with a coupon rate of 9.375 per cent. At the time of issue, the bonds sold at par. Today bonds of similar risk and maturity will pay a coupon rate of 6.25 per cent. Assuming semiannual coupon payments and a face value of $1000, what will be the current market price of the company's bonds?

Additional question in Moodle

Justin Ltd is planning to issue 15-year bonds with a face value of $1000. The going market rate for such bonds is 3.25 per cent. Assume that coupon payments will be semiannual. The company is trying to decide between issuing an 6 per cent coupon bond or a zero coupon bond. The company needs to raise $1 million.

a. What will be the price of the 6 per cent coupon bonds?

b. How many coupon bonds would have to be issued?

c. What will be the price of the zero coupon bonds?

d. How many zero coupon bonds will have to be issued?