Question
You are examining three bonds with a par value of $1 000 (you receive $ 1 000 at maturity) and are concerned with what would
You are examining three bonds with a par value of $1 000 (you receive $ 1 000 at maturity) and are concerned with what would happen to their market value if interest rates (or the market discount rate) changed. The three bonds are:
Bond A a bond with 5 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually.
Bond B a bond with 11 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually.
Bond C a bond with 16 years left to maturity that has an annual coupon interest rate of 8 percent, but the interest is paid semiannually.
What would be the value of these bonds if the market discount rate were
a. 8 percent per year compounded semiannually?
b. 6 percent per year compounded semiannually?
c. 17 percent per year compounded semiannually?
d. What observations can you make about these results?
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