In: Accounting
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.
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%