To answer questions, assume “All else equal” 21. A bond that has a yield of 4%...

To answer questions, assume “All else equal”

21. A bond that has a yield of 4% and a coupon rate of 5% must have price that is higher than/lower than a zero-coupon bond.

22. A bond that is callable is likely to be called when yields are higher than/lower than/equal to its coupon rate.

Expert Solution

Ques 21

higher

explanation

coupon	5%
YTM	4%
Pirce	1000	(assumed)
time	5	years	(assumed)

Normal Bond
Time	Amount	PV factor @4%	Total
1	50	0.96	48.08
2	50	0.92	46.23
3	50	0.89	44.45
4	50	0.85	42.74
5	1050	0.82	863.02
Price Today			1,044.52

ZCB
Time	Amount	PV factor @4%	Total
1	0	0.96	-
2	0	0.92	-
3	0	0.89	-
4	0	0.85	-
5	1000	0.82	821.93
Price Today			821.93

Ques 2

A bond that is callable is likely to be called when yields are lower than to its coupon rate.

say right now callable bonds coupon rate is 5% , Market interest rate is 4% , so the company now has has incentive to call the bonds back and raise new capital at lower yield of 4%

ekkarill92 answered 2 years ago

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