Question
Suppose XYZ corporation issues a bond with 10 years to maturity. The XYZ bond has an annual coupon of $80 and a face value of
Suppose XYZ corporation issues a bond with 10 years to maturity. The XYZ bond has an annual coupon of $80 and a face value of $1,000.
a) Assuming similar bonds have a yield of 8 percent, what will this bond sell for?
b) Suppose that a year has gone by, if the interest rate in the market has risen to 10 percent what will the bond be worth?
c) (Independent of a) and b) above) Suppose you invest $1,000 in a one-year bond that makes a single payment of $1,100 at the end of the year. If prices rise over the year by 6%, what will the real payoff be at the end of the year? Explain.
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