Question

2. Consider a bond selling at par ($1000) with a coupon rate of 6% and 10 years to maturity. (Assuming

     semi-annual coupon payments)

      (a) What is the price of this bond if the required yield is 8%?

      (b) What is the price of this bond if the required yield increases from 8% to 9%, and by what percentage   

            did the price of this bond change?

Twitchy – a kind of junk bond – carries a 10% coupon rate, has a $1,000 face value and matures in 5 years. What is the change in the implicit required return (that is, YTM) of Twitchy, if the current market price of Twitchy, which is $950, falls to $850?

a.    -4.10%

b.    +2.96%

c.   +11.34%

d.   -14.30%

6.   On March 28, 2008, Toyota Motor Credit Corporation (TMCC), a subsidiary of Toyota Motor,

      offered some securities for sale to the public. Under the terms of the deal, TMCC promised to   

      repay the owner of one of these securities $100,000 on March 28, 2038, but investors would

      receive nothing until then. Investors paid TMCC $24,099 for each of these securities; so they

      gave up $24,099 on March 28, 2008, for the promise of a $100,000 payment 30 years later.

Consider the following questions based on the above information:

1. Why would TMCC be willing to accept such a small amount today ($24,099) in exchange for a promise to repay about four times that amount ($100,000) in the future?

(b) Would you be willing to pay $24,099 today in exchange for $100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?

(c) Suppose that when TMCC offered the security for $24,099, the U.S. Treasury had offered an essentially identical security. Do you think it would have had a higher or lower price?   Why?

(d) The TMCC security is bought and sold on the New York Stock Exchange. If you looked at the price today, do you think the price would exceed the $24,099 original price? Why? If you looked in 2022, do you think the price would be higher or lower than today’s price? Why?

Answer 1

2)