Question
Consider this case: On March 1, 2015, ABC, Inc. issued a 10 year bond (with a typical $1,000 face value) that had an annual coupon
Consider this case: On March 1, 2015, ABC, Inc. issued a 10 year bond (with a typical $1,000 face value) that had an annual coupon value of $45.
NOTE: Assuming that the 2021 coupon has just been redeemed.
- Initially, the bond was sold at a premium price of $1,015.
- On March 1, 2021, this bond was selling at a discount for $976.
- The market rate of interest for a riskless corporate bond, of this maturity (i.e., a Treasury security), was 2.9% on March 1, 2021, which reflected market expectations about future rates of inflation.
(a) What were the yield to maturity AND the risk premium for this bond on March 1, 2021?
(b) Suppose today is March 1, 2021 and suddenly the Federal Reserve announces a massive program to reduce inflation. Instantly, the market rate of interest for a riskless corporate bond that would apply to this bond (i.e., a Treasury security), falls from 2.9% to 2.22%. If there is no change in the risk premium expected for this ABC, Inc. bond (based on (a)), what will be this bonds yield to maturity?
(c) Following from (b), what must be the new selling price for this bond?
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