You are purchasing a 20-year bond that matures in 6 years. The bond has a par...

You are purchasing a 20-year bond that matures in 6 years. The bond has a par

value of $5,000, coupon rate of 3%, and is selling on the secondary market for

$4,800.

a. (5 points) What is the Yield to Maturity of this bond now?

b. (8 points) What has happened to interest rates since this bond was issued 15

years ago? Explain.

Expert Solution

a)

b)

Since issued 15 years ago, it is seen that interest rates have arisen from 3% to 3.76% . Interest rates are inversely proportional to the bond prices and if the bond is selling below par ie at discount , it means that the YTM of the bonds have risen above the coupon rate of the bond. If YTM increases further, the price falls further.

Formulae ( as per excel)

jeff jeffy answered 2 years ago

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You are purchasing a 20-year bond that matures in 6 years. The bond has a par...

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