Question 1

2 separate firms, Everlast Co and Ephemeral Co both have 8% p.a. coupon bonds outstanding. These bonds pay annual coupons and are currently priced at par value.

Everlast Cos bond has 15 years to maturity while Ephemerals has 4 years to maturity.

1. a) Based on the above information, what is the current yield to maturity required in the

   market? Explain your answer

2. b) If interest rates increase by 3%, what is the percentage change in the price of Everlast

   and Ephemerals bonds?

3. c) If interest rates decrease by 3% instead, what is the percentage change in the price of

   Everlast and Ephemerals bonds?

4. d) Discuss why the percentage changes in the Everlast and Ephemeral bonds are

   different during interest rate changes.

5. e) Discuss which of the bonds an investor will buy, if he suspects a recession is

   occurring in 3 months.