Question
The following is certain information about three bonds. All numerical answers should be calculated to at least two decimal places. By convention, the face value
- The following is certain information about three bonds. All numerical answers should be calculated to at least two decimal places. By convention, the face value of all bonds is taken as
$100. For simplicity, assume coupon payments are paid once a year.
Bond A: coupon rate = 9.75%, term to maturity=10 years, current price = $160.55. Bond B: coupon rate = 11.25%, term to maturity=5 years, yield to maturity =2.35% p.a. Bond C: coupon rate = 6%, term to maturity = 1 year, yield to maturity = 1.45% p.a.
1. Suppose an investor buys all these three bonds today at their current prices. Further suppose the market interest rates increase across the board by 200 basis points a year later. For each bond, find the new bond price, the rate of capital gain or loss and the rate of return. Show the steps.
2. Also, what can you infer about the relationships between the rate of return and the maturity of bonds?
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