Question
Ali is evaluating issuing bonds for his company and he discusses the various characteristics of a bond with his colleague and he asks the following
Ali is evaluating issuing bonds for his company and he discusses the various characteristics of a bond with his colleague and he asks the following question:
- What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value.
Ali finally decides to issue the bond for his company. A 15-year, 6% coupon bond pays interest annually. The bond has a face value of $1,000.
2. What is the change in the price of this bond if the market yield to maturity rises to 6.5% from the current rate of 6.25%?
Ali the asks his colleagues about the return of the bond and makes the comment "Investors who purchased bonds several years ago enjoyed double digit yields. These same investors today are complaining loudly about the current low single digit returns. Are investors that much worse off today?"
3. Explain what investors should be considering and how to determine whether they are better off or worse off today than they were several years ago.
Ali then assumes the real rate of interest on 1-year, 10-year, and 30-year bonds is 3%. He also assumes the rate of inflation is expected to be 3% for the coming year.
4. Considering only an inflation premium, construct an example showing how an expected increase in the rate of inflation leads to an upward sloping term structure via the Fisher effect. Then, explain how the addition of interest rate risk will affect your results.
Ali then talks to his friend who works in a bond rating agency. One of the bond rating agencies ran into controversy when it began rating bonds of some companies without their approval. Many of the companies whose bonds were rated in this manner were upset by this.
5. Why do you think a company would be unhappy to receive a "free" bond rating?
I need references and I need handwritten answers or word file.
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