Question
A $1000 face value bond has a 6 percent coupon, with interest paid annually. The bond will mature 10 years from today. Parts A., B.,
A $1000 face value bond has a 6 percent coupon, with interest paid annually. The bond will mature 10 years from today. Parts A., B., and C. all use this preliminary information, but the three questions are otherwise independent. Part D extends (and refers back to the answer from) Part C.
A. What is the bonds price if the required return (i.e., the yield to maturity) is 3%? Why does the bond sell for a premium?
B. What is the bonds price if the required return (i.e., the yield to maturity) is 9%? Why does the bond sell for a discount?
C. Assume that the bonds price is $950. What is the yield to maturity?
D. Assume that you buy the bond today for $950 (with 10 years until maturity), and sell it for $1,000 one year from now (with 9 years to maturity), immediately after receiving the coupon payment. What was your one period holding period return (this is a %!)? Did interest rates increase or decrease over this one year holding period? (Hint: Compare the HPR in this part to the required YTM you calculated in Part C).
you must show supporting work, or describe the numbers you input to your calculator (i.e., enter PMT = 2000; i = 5%; n = 20. Solve for PV = ZZZ).
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