Arjay purchases a bond, newly issued by Amalgamated Corporation, for $1,000. The bond pays $50 to its holder at the end of the first few years and pays $1,050 upon its maturity at the end of the 20 years.

a. What are the principal amount, the term, the coupon rate, and the coupon payment for Arjays bond? Instructions: Enter your responses as whole numbers. Principal amount: $ Term: years Coupon rate: % Coupon payment: $ b. After receiving the second coupon payment (at the end of the second year), Arjay decides to sell his bond in the bond market. What price can he expect for his bond if the one-year interest rate at that time is 3 percent? 8 percent? 10 percent? Instructions: Enter your responses as whole numbers. Expected price for the bond at: 3 percent: $ 8 percent: $ 10 percent: $ c. Suppose that after two years, the price of Arjays bond falls below $1,000, even though the market interest rate equals the coupon rate. One possible reason is that:

multiple choice

• there is good news about Amalgamated Corporation, leading financial investors to demand more of the company's bonds.

• there is bad news about Amalgamated Corporation, leading financial investors to fear that the firm might go bankrupt and not pay off its debt in one year.

• there is a very good chance that a final payment of more than $1,060 will be made, so financial investors will be willing to pay $1,000 for the bond since they know they can earn 6 percent.

• bad news arrives about Amalgamated Corporation, leading financial investors to strongly believe that the firm would promptly pay off its debt in one year.