Question
(Bond valuation) You are examining three bonds with a par value of $1,000 (you receive $1,000 at maturity) and are concerned with what would happen
(Bond valuation) You are examining three bonds with a par value of $1,000 (you receive $1,000 at maturity) and are concerned with what would happen to their market value if interest rates (or the market discount rate) changed. The three bonds are
Bond A-a bond with 6 years left to maturity that has an annual coupon interest rate of 9 percent, but the interest is paid semiannually.
Bond B-a bond with 11 years left to maturity that has an annual coupon interest rate of 9 percent, but the interest is paid semiannually.
Bond C-a bond with 18 years left to maturity that has an annual coupon interest rate of 9 percent, but the interest is paid semiannually.
What would be the value of these bonds if the market discount rate were
a. 9 percent per year compounded semiannually?
b. 5 percent per year compounded semiannually?
c. 16 percent per year compounded semiannually?
d. What observations can you make about these results?
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