Question
Anh Nguyen is a recent SU graduate who is interested in investing some of her savings in corporate bonds. Her financial planner has suggested the
Anh Nguyen is a recent SU graduate who is interested in investing some of her savings in corporate bonds. Her financial planner has suggested the following bond: Bond A has 7.5% coupon rate, paid semi-annually, mature in 15 years, and has a $1000 face value. The bond has a yield to maturity of 6% a) Without calculating the price of the bond, indicate whether the bond is trading at a premium, at a discount, or at par. Explain your reason. In other words, use concepts to justify your conclusion, without actually calculating the bond price here. b) Calculate the price of the bond. c) If one year after Anh purchased the bond, the yield of maturity increases to 8%, what will be the price of the bond at this time point, right BEFORE its 3rd coupon payment? What will be the price of the bond at this time point, immediately AFTER its 3rd coupon payment? d) When the financial advisor recommended Bond A to Anh, she was also considering three other bonds besides Bond A: Bond B has 7.5% coupon rate, paid semi-annually, mature in 10 years, and has a $1000 face value. Bond C has 5% coupon rate, paid semi-annually, mature in 10 years, and has a $1000 face value. Bond D has 10% coupon rate, paid semi-annually, mature in 15 years, and has a $1000 face value. Which of these four bond has the highest interest rate risk? Explain
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