RQ1 How is a bond like a loan?

RQ6 Explain the relationship between interest rates and bond prices.

P5 What is the price per $100 face value of a two-year, zero-coupon, risk-free bond?

Current Zero-Coupon Yield Curve for risk-free bonds

Maturity (years)	1	2	3	4	5
YTM	5%	5.5%	5.75%	5.95%	6.05%

P9 The yield to maturity of a $1000 bond with a 7% coupon rate, semi-annual coupons and two years to maturity is 7.6% APR, compounded semi-annually. What must its price be?

15. Suppose a seven-year, $1000 bond with an 8% coupon rate and semi-annual coupons is trading with a yield to maturity of 6.75%.

Is this bond currently trading at a discount, at par or at a premium? Explain.

If the yield to maturity of the bond rises to 7% (APR with semi-annual compounding), what price will the bond trade for?

Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%.

16 What was the price of this bond when it was issued?

18 Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

22 Which of the bonds AD is most sensitive to a 1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Provide an intuition explanation for your answer.

Bond	Annual coupon rate	Maturity (years)
A	0%	15
B	0%	10
C	4%	15
D	8%	10

25

Jackson Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000.

Jackson believes it can get a rating of A from Standard & Poors.

However, due to recent financial difficulties at the company, Standard & Poors is warning that it may downgrade Jackson Industries bonds to BBB.

Yields on A-rated, long-term bonds are currently 6.5%, and yields on BBB-rated bonds are 6.9%.

What is the price of the bond if Jackson Industries maintains the A rating for the bond issue?

b. What will the price of the bond be if it is downgraded?