Question
A firm has a liability of $10,000 in five years. The firm funds the liability by purchasing a bond redeemable at par. The bond pays
A firm has a liability of $10,000 in five years. The firm funds the liability by purchasing a bond redeemable at par. The bond pays annual coupons of 4% and is priced at $8,219.27 to yield a 4% annual effective yield.
Under scenario A, immediately after purchase of the bond, the interest rate for reinvesting the coupons falls to 3.70%.
Under scenario B, immediately after purchase of the bond, the interest rate for reinvesting the coupons rises to 4.30%.
Find the dollar amount of profit or loss under the two scenarios.
(A) A: 0 profit. B: 0 profit
(B) A: 14.34 loss. B: 14.51 profit.
(C) A: 10.64 loss. B: 10.71 profit.
(D) A: 10.71 profit. B: 10.64 loss.
(E) A: 14.51 profit. B: 14.34 loss.
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