Question

Today, you bought one corporate semi-annual bond with $1,000 par value, 8% coupon

rate, 10 years left to maturity. The current interest rate of the bond is 10%.

15. What is the price of the bond today?

a. $875.38

b. $877.11

c. $1,000.00

d. $1,135.90

16. How much interest (not just coupon) in total should the corporation pay you in the

next five years?

a. $400.00

b. $445.20

c. $447.40

d. $447.07

(Hint: you need to distinguish interest from coupon. Coupon = par value × coupon rate,

and interest = debt principal outstanding × interest rate of the debt. You also need to

know that the “interest rate of the debt” is the market interest at the time of borrowing,

not the market interest rate in subsequent periods. In addition, you need to know that

mortgage loans and bonds are very similar because both are debts. So, the logic of Fixed Rate Mortgage (FRM) amortization is applicable to bond amortization. You need to do the bond amortization. Continue the previous question.)

17. How much will the corporation owe you at the end of the fifth year?

a. $1,081.11

b. $922.78

c. $924.18

d. $1000.00

(Hint: if you are able to work out the last problem, you should also be able to solve this

one. This problem is also about bond amortization.)

18. Suppose the market interest rate does not change in the next ten years and the

corporation does not default on the bond, which of the following statements about the

bond’s price over the next 10 years is TRUE?

a. The bond’s price is decreasing over time until it becomes $1,000 at the time of

maturity.

b. The bond’s price is unchanged over time.

c. The bond’s price is increasing over time until it becomes $1,000 at the time of

maturity.

d. The bond’s price is undetermined.

(Hint: if you are able to work out the last problem, go one step further, I believe you can

also think this out. The last problem helps you to think out this one.)

Answer 1