Question
Bond A and Bond B have a face value of $1000. Both bonds have 8% coupon rate and make semimanual payments. Other similar bonds have
Bond A and Bond B have a face value of $1000. Both bonds have 8% coupon rate and make semimanual payments. Other similar bonds have a yield to maturity (YTM) of 8%. Bond A has 10 years to maturity, whereas Bond B has 30 years to maturity.
- What should be the price of Bond A when its YTM is 8%?
(1 mark)
- If YTM rises by 2%, what is the new price of bond A and Bond B? What is the percentage price change of each of these bonds? Show your calculations.
(4 marks)
- If YTM falls by 2%, What is the new price of each of these bonds? What is the percentage price change of each of these bonds? Show your calculations.
(4 marks)
- With new lower YTM in point (c), are these premium or discount bonds (why)?
(1 mark)
- What does this problem tell you about the relationship between the interest rate risk and time till maturity for bonds?
(1 marks)
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Fundamentals Of Corporate Finance
Authors: Stephen A Ross, Randolph W Westerfield, Bradford D Jordan
7th Edition
0073134295, 9780073134291
