Question
Last year, the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later, the yield on these same bonds had climbed to about
Last year, the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later, the yield on these same bonds had climbed to about 6 percent because the Reserve Bank of Australia increased interest rates during the year. Assume that BHP Billiton Limited issued a 10-year, 5 percent coupon bond one year ago (on 1 January). On the same date, Rio Tinto Limited issued a 20-year, 5 percent coupon bond. Both bonds pay interest annually. Assume that the market rate on similar risk bonds was 5 percent at the time the bonds were issued.
- Compute the market value of each bond at the time of the issue. (1.5 marks)
- Compute the market value of each bond one year after issue if the market yield for similar risk bonds were 6 percent. (1.5 marks)
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