Question
a) Consider two coupon bonds A and B (which are risk free) with a maturity of 15 years and 30 years respectively. Both bonds have
a) Consider two coupon bonds A and B (which are risk free) with a maturity of 15 years and 30 years respectively. Both bonds have a $100-face value and 8% coupon payments (paid annually). If the yield to maturity increases from 6% to 7%, what will be the percentage change in the price of each of these two bonds (A and B)? What conclusion can you reach? Show your work and explain your result
b) Suppose that the 15-year $100-face value government (risk-free) coupon bond with 8% coupon payments (paid annually) is currently selling at par. Rover Companys bonds are rated AA, and the credit spread on these bonds is 3%. At what price would you be willing to purchase a 15-year $100-face value Rover-Company bond if it offers 8% coupon payments (paid annually)?
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