Question
Given the following bond: 30 years, 5.25% semiannual AAA corporate bond in its 10th year of issue. The current market interest rate is 4.75%. What
Given the following bond: 30 years, 5.25% semiannual AAA corporate bond in its 10th year of issue. The current market interest rate is 4.75%.
What is the current price of the bond? What would be the effect of a change in the market price of the bond if the market interest rate increased to 5%? Calculate the difference. If this bond was callable, what would be the effect on market price over a non-callable bond? Would the price be higher, or lower? If this bond was a sinking fund bond, what would be the effect on market price compared to a non-sinking fund bond? Would the price be higher, or lower? Explain. What the effect would be on these two investments if the Federal Reserve announces a raise in the interest rate of .5% (the Federal Funds rate actually); effective immediately.
2. Given disposition effects,
How would changes in the interest rate for bonds be different than for any other investments? That is, would a bond buyer be more likely to hold or sell when interest rates move in the opposite direction than the bond investor expects. Do you believe callable bonds are more conducive to disposition effects than on bonds without the callable provision? Explain.
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