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Consider two corporate bonds, A and B, each with a face value of $1,000, remaining term of 10 years and yield-to-maturity of 8% per annum.
Consider two corporate bonds, A and B, each with a face value of $1,000, remaining term of 10 years and yield-to-maturity of 8% per annum. A has a coupon rate of 0% and B has a coupon rate of 6% and makes semi-annual payments.
- Calculate the current price of each bond
- Assume that the yield to maturity of each bond increases from 8% to 10% per annum.
Calculate the percentage change in price of each bond.
- Instead assume that the yield to maturity of each bond decreases to 6%.
Calculate the percentage change in price of each bond.
- Based on (b) and (c) what conclusions can you draw about the relationship between
interest rates, coupon rates and bond prices.
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