Question

1) A 10-year corporate bond has a coupon rate of 6% with annual payments. If interest rates rise to 8% on similar bonds, then what is the value of the bond in the marketplace?

2) A 10-year corporate bond has a coupon rate of 6% with quarterly payments. If interest rates rise to 8% on similar bonds, then what is the value of the bond in the marketplace?

3) A 100-year corporate bond has a coupon rate of 6% with annual payments. If interest rates drop to 4% on similar bonds, then what is the value of the bond in the marketplace?

4) A 100-year corporate bond has a coupon rate of 6% with monthly payments. If interest rates drop to 4% on similar bonds, then what is the value of the bond in the marketplace?

5) A 30-year annual bond is offered at 6%. After that the buyer of the bond sells the bond to someone else, but in between interest rates rose to 6.5%. Why is the first buyer of the bond upset with what the second buyer of bond is willing to pay?

6) A 10-year corporate bond has a coupon rate of 6% with annual payments. If the current value of the bond in the marketplace is $900, then what is the Yield-to-Maturity (YTM)?

7) A 100-year corporate bond has a coupon rate of 6% with semi-annual payments. If the current value of the bond in the marketplace is $400, then what is the Yield-to-Maturity (YTM)?

8) How much do you pay for a zero coupon government bond that has a term of 30 years, an interest rate of 6%, and a par value of $1000.

9) A taxable bond has a yield of 6% and a municipal bond has a yield of 4.6%. If you are in a 23% tax bracket, which bond do you prefer?

10) A taxable bond has a yield of 8% and a municipal bond has a yield of 6%. If you are in a 23% tax bracket, which bond do you prefer?

Answer 1

1) A 10-year corporate bond has a coupon rate of 6% with annual payments. If interest rates rise to 8% on similar bonds, then what is the value of the bond in the marketplace?

Ans: As interest rate has increased, the value of the bond in the market place will decrease. Interst rate and value of bond has inverse relationship. As interest rate has increased, investors will prefer buying interest paying instruments and will not buy bonds which are offering less coupon than interest rates. As the demand of bonds are going down, the value of bonds will fall in the marketplace.

2) A 10-year corporate bond has a coupon rate of 6% with quarterly payments. If interest rates rise to 8% on similar bonds, then what is the value of the bond in the marketplace?

Ans: 6% quarterly payments means 6*4=24% annual payments as an year has four quarters. Interest rate is 8% and coupon rate is 24% annually. As bonds are paying more coupon, investors will prefer bonds and demand of bonds will rise. This will raise the value of bond in the marketplace.

3) A 100-year corporate bond has a coupon rate of 6% with annual payments. If interest rates drop to 4% on similar bonds, then what is the value of the bond in the marketplace?

Ans: Here, the interest rate is less than coupon so naturally bond demand will be higher increasing the value of bond in market place.

4) A 100-year corporate bond has a coupon rate of 6% with monthly payments. If interest rates drop to 4% on similar bonds, then what is the value of the bond in the marketplace?

Ans: 6% monthly payment means 6*12=72% yearly payment. Interest rate is 4% lesser than bond coupon rate. As bond is paying more coupon, investors will prefer bonds more. This increased demand for bond will increase the value of bond in marketplace.