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Question 2 [20 Marks] Identify the key differences between the par value and the market value of a bond. [4 marks] A zero-coupon bond is

Question 2 [20 Marks]

  1. Identify the key differences between the par value and the market value of a bond.

[4 marks]

  1. A zero-coupon bond is selling for $476. The bond has a face value of $1,000 and matures in 8 years. Your friend asks you if he should buy the bond. He tells you his required return is 9 percent. Would you recommend he buy the bond or not? Explain your answer.

[3 marks]

  1. How do credit rating agencies arrive at a bond rating decision?

[5 marks]

  1. Using diagrams, demonstrate your understanding of payoff for the buyers and issuers (or writers) of call and put options.

[8 marks]

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