Question

In: Finance

9. A 5.50 percent coupon bond with 14 years left to maturity is priced to offer...

9. A 5.50 percent coupon bond with 14 years left to maturity is priced to offer a 5.20 percent yield to maturity.
You believe that in one year, the yield to maturity will be 4.80 percent. What is the dollar change in price that
the bond will experience? (Assume semi-annual interest payments and $1,000 par value.)
A. less than – $10
B. less than $15 but more than – $10
C. less than $35 but more than $15
D. less than $70 but more than $35
E. more than $70


10. Consider a 20-year coupon bond with $65 annual coupons. The next coupon is due one year from today.
Assume that the yield curve is flat and so all yields are 7.5%, and yields are expected to remain constant over
the bond's life. Calculate the future value of the coupon payments. If all of the coupon payments are
reinvested at time of payment, how much interest will a bond investor have earned on the re-invested
coupons at the time of maturity?
A. less than $1,456
B. more than $1,456 but less than $1,518
C. more than $1,518 but less than $1,572
D. more than $1,572 but less than $1,654
E. more than $1,654

Solutions

Expert Solution

9. Price of Bond Now at 5.20% Yield = $1029.57

Price of Bond after 1 year at Yield 4.80% = $1067.12

Change in Price of Bond = $1067.12 - $1029.57

Change in Price of Bond = $37.55 Option D less than $70 but more than $35

10. Interest Earned = $2814.80 - $65 * 20 = $1514.80 Option B more than $1,456 but less than $1,518


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