Consider a 20-year bond with an annual coupon of 10%. The coupon rate will remain fixed...

Consider a 20-year bond with an annual coupon of 10%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 8%. Which of the following statements is correct?

1) The bond should currently be selling at its par value.

2) If market interest rates decline, the price of the bond will also decline.

3) If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.

4) The bond is currently selling at a price below its par value.

5) If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.

Solutions

Expert Solution

The correct statement is Option 5 "If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today"

Explanation: The Bond price is calculated by the discounted cash flows of all the earnings that the bond is going to generate over the periods. When the Yield rate is lower than coupon rate, then the value of the bond will be higher than face value as the discount rate we use is yield rate and the present value of bond or discounted cash flow will be higher than face value. but as the years to maturity will approach the gap between the market value and face value will start diminishing.

The bond should be currently selling at higher price than face value, It cannot go below the face value when the coupon rate is higher than yield. Therefore, Options 1 & 4 are wrong and when the interest rate gets lower than the bond price will increase, therefore option 2 is wrong.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You purchase a 10 year bond with an annual fixed coupon rate of 7% and a...

You purchase a 10 year bond with an annual fixed coupon rate of 7% and a par value of $1,000, when the yield to maturity on such bonds is 6%. You hold the bond for a year and then sell it. Assume the yield to maturity on the bond falls to 5.5% by the time you sell. What is your holding period return?

First, consider a 10 year bond with a coupon rate of 7% and annual coupon payments....

First, consider a 10 year bond with a coupon rate of 7% and annual coupon payments. Draw a graph showing the relationship between the price and the interest on this bond. The price should be on the y- axis and the interest rate on the x-axis. To compute the various prices, consider interest rates between 2% and 12% (use 0.5% increments). So your x-axis should go from 2%, then 2.5% ... until 11.5% and then 12%. Is the relationship linear...

Q21. Consider a 2-year bond. The coupon rate of the bond is 10%, and the bond...

Q21. Consider a 2-year bond. The coupon rate of the bond is 10%, and the bond pays coupons semiannually. The bond is selling at a yield to maturity of 8.0% annually, or 4.0% semi-annually. (a) What is the duration of the bond measured in half-years and in years? (10 points) (b) If the semi-annually yield changes from 4.0% to 5.0%, what is the predicted change in the price of the bond (a dollar amount) using duration? (7 points) (c) Suppose...

Consider two bonds, a 3-year bond paying an annual coupon of 7%, and a 20-year bond,...

Consider two bonds, a 3-year bond paying an annual coupon of 7%, and a 20-year bond, also with an annual coupon of 7%. Both bonds currently sell at par value. Now suppose that interest rates rise and the yield to maturity of the two bonds increases to 10%. a. What is the new price of the 3-year bond? (Round your answer to 2 decimal places.) b. What is the new price of the 20-year bond? (Round your answer to 2...

Bond A: 10-year annual bond, price $1010, coupon rate 6% par $1000 bond B: 10-year semi-annual...

Bond A: 10-year annual bond, price $1010, coupon rate 6% par $1000 bond B: 10-year semi-annual bond, price $1010, coupon rate 6%, par $1000 Does bond A has a higher cost of debt than bond B?

Assume that you are considering the purchase of a 20-year, bond with an annual coupon rate...

Assume that you are considering the purchase of a 20-year, bond with an annual coupon rate of 10%. The bond has a par value of $1,000, and it makes annual interest payments. If you require an 8% yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? Explain why the price is different from the par value.

Assume that you are considering the purchase of a 20-year, bond with an annual coupon rate...

Assume that you are considering the purchase of a 20-year, bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 9.7% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? (With excel formulas)

last year you purchased a 10 year semi-annual coupon bond with coupon rate of 12% and...

last year you purchased a 10 year semi-annual coupon bond with coupon rate of 12% and face value of $1000. the bonds yield to maturity was 11% then. a year past and the market interest rate increases by 1 percentage point. your one-year holding period return is____% (rounded with two decimal places)

Consider two bonds, a 3-year bond paying an annual coupon of 6.50% and a 10-year bond...

Consider two bonds, a 3-year bond paying an annual coupon of 6.50% and a 10-year bond also with an annual coupon of 6.50%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 9%. a. What is the new price of the 3-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round your answer to...

Consider two bonds, a 3-year bond paying an annual coupon of 7.00% and a 10-year bond...

Consider two bonds, a 3-year bond paying an annual coupon of 7.00% and a 10-year bond also with an annual coupon of 7.00%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 12%. a. What is the new price of the 3-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round your answer to...

Subjects