Question
An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to
- An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.6%. One bond, Bond C, pays an annual coupon of 10%; the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 9.6% over the next 4 years, what will be the price of each of the bonds at the following time periods? Fill in the following table:
T | Price of Bond C | Price of Bond Z |
---|---|---|
0 | blank 1 | blank 2 |
1 | blank 3 | blank 4 |
2 | blank 5 | blank 6 |
3 | blank 7 | blank 8 |
4 | blank 9 | blank 10 |
2. Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.
- Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?
- Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?
- Suppose that 2 years after the issue date (as in Part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price ofthe bonds over time?
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