9) Bond A is a $600 coupon bond that pays a coupon interest of 9% and...

9) Bond A is a $600 coupon bond that pays a coupon interest of 9% and matures 4 years from now. Bond B is a $900 coupon bond that pays a coupon interest of 6% and matures 4 years from now. If market interest rates are 4%, then the present value of bond A is = $______.

10) Bond A is a $600 coupon bond that pays a coupon interest of 9% and matures 4 years from now. Bond B is a $900 coupon bond that pays a coupon interest of 6% and matures 4 years from now. If market interest rates are 4%, then the present value of bond B is= $______.

11) Bond A is a $600 coupon bond that pays a coupon interest of 9% and matures 4 years from now. Bond B is a $900 coupon bond that pays a coupon interest of 6% and matures 4 years from now. If market interest rates are expected to rise to 4%, then investors prefer bond ______ over bond ______ because the rate of return on bond A is ______%; and the rate of return on bond B is ______%.

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Solutions

Expert Solution

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 4% (YTM of bonds = market interest rate)

nper = 4 (Years remaining until maturity with 1 coupon payment each year)

pmt = 600 * 9% (annual coupon payment = face value * coupon rate)

fv = 600 (face value receivable on maturity)

PV is calculated to be $708.90

10]

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = 4% (YTM of bonds = market interest rate)

nper = 4 (Years remaining until maturity with 1 coupon payment each year)

pmt = 900 * 6% (annual coupon payment = face value * coupon rate)

fv = 900 (face value receivable on maturity)

PV is calculated to be $965.34

11]

Market interest rates are currently 4% as given in parts (9) and (10). Question of market rates rising to 4% seems to be incorrect. Please check.

jeff jeffy answered 1 year ago

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