Question

1.1 Suppose for $1,00 you could buy a 10%, 10-year, annual payment bond or a 10%, 10-year, semi annual payment bond. They are equally risky. which would you prefer? if $1,000 is the proper price for the semi-annual bond, what is the equilibrium price for the annual payment bond?

1.2 What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? what does the fact that it sells at a discount or at a premium tell you about the relationship between rd and the coupon rate?

1.3 What is price risk? Which has more price risk, an annual payment 1-year bond or a 10-year bond? Why?

1.4 What is reinvestment risk? Which has more reinvestment risk, a 1-year bond or a 10-year bond?

PS. Please include refferences if any are used.

Answer 1

1.1
Semi-annual
if $1,000 is the proper price for the semi-annual bond, what is the equilibrium price for the annual payment bond?
=10%*1000/(1.05^2-1)*(1-1/(1.05^2)^10)+1000/(1.05^2)^10
=984.8021825

1.2 What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887.00?
=RATE(10,9%*1000,-887,1000)=10.91%

That sells for $1,134.20?
=RATE(10,9%*1000,-1134.20,1000)=7.08%

what does the fact that it sells at a discount or at a premium tell you about the relationship between rd and the coupon rate?
If a bond trades at premium, rd<coupon rate
If a bond trades at discount, rd>coupon rate

1.3 What is price risk?
If interest rate increases, price falls
Which has more price risk, an annual payment 1-year bond or a 10-year bond? Why?
10-year bond because of higher duration

1.4 What is reinvestment risk?
Reinvesting the received cash flows at lower rate of interest than planned
Which has more reinvestment risk, a 1-year bond or a 10-year bond?
1 year bond