Question

In: Accounting

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.

Solutions

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%


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