non callable callable Coupon 3% 4% call price N.A 1100 If interest rate expected to fall,which...

	non callable	callable
Coupon	3%	4%
call price	N.A	1100

If interest rate expected to fall,which bond will you choose.Explain

Expert Solution

First let me explain the relationship between interest rates and coupon rate of the bond.

The coupon rate and Interest rates are inversely related. This means in case interest rate is more than coupon rate then the price of the bond will fall since the investor may sell the bond and invest in other security which pays more return for same tenure as that of bond.

Inversely it can be interpreted as per the requirement in the question if interest rate is expected to fall below coupon rate then in this case we shall buy the bond whose coupon rate is higher since the investor will earn higher return.

In the given question the investor shall buy the callable bond since its coupon rate is higher i.e. it is paying interest @ 4% and in case if the bond is redeemed before the tenure of the bond by the issuer then the redeemable value per bond will be more than the face value of the bond. Therefore, the investor will be able to earn higher return.

Conclusion:

The investor should purchase Callable bond because its coupon rate is higher.

jeff jeffy answered 1 year ago

Maturity April 3, 2019 Coupon (current) 5.5% YTM 5.5% Callable? Yes (currently callable) Call Price 102...

Maturity April 3, 2019 Coupon (current) 5.5% YTM 5.5% Callable? Yes (currently callable) Call Price 102 You are an interest rate contrarian - unlike the rest of the market, you project that 10-year Treasury Note rates will decrease by 100 bps in one year. In your view, is it a good or bad time to buy this bond?

-A 15-year maturity, 8% coupon bond is callable in 5 years at a call price of...

-A 15-year maturity, 8% coupon bond is callable in 5 years at a call price of $1,050. The bond currently sells at yield to maturity of 7% a- What is the yield to call ? b- What is the yield to call if the call price is only $1000 c- What is the yield to call if the call price is $1050, but the bond can be called in 2 years instead of 5 ?

Given this Binomial interest rate tree with volatility, please calculate the price of the CALLABLE BOND....

Given this Binomial interest rate tree with volatility, please calculate the price of the CALLABLE BOND. Use the Backward Induction process we have reviewed in class. The below are 1-year forward rates. Ex: 2.96% is the 1y rate, 2-years forward. Assume 50%/50% probability of an up or down move in rates Bond Coupon = 2.35% pays annually; Bond Matures in Year 3; Callable in Years 1 and 2 at $100 Par Value = $100; Assume ANNUAL COMPOUNDING Year 0 Year...

The interest rate on a one-year bond selling today is 4% and the expected interest rate...

The interest rate on a one-year bond selling today is 4% and the expected interest rate on a one-year bond selling one year from today is 2%. If the liquidity premium is 0.5%, then according to liquidity premium theory, the interest rate on a two-year bond selling today is about

The nominal rate of interest is 7% and the real rate of interest is 3%. What is the expected inflation rate?

EXPECTED INTEREST RATE Lourdes Corporation's 13% coupon rate, semiannual payment, $1,000 par value bonds, which mature...

EXPECTED INTEREST RATE Lourdes Corporation's 13% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 20 years, are callable 4 years from today at $1,050. They sell at a price of $1,258.68, and the yield curve is flat. Assume that interest rates are expected to remain at their current level. What is the best estimate of these bonds' remaining life? Round your answer to two decimal places. years If Lourdes plans to raise additional capital and wants to...

As interest rate volatility decreases, which of the following bond value would increase: a callable bond,...

As interest rate volatility decreases, which of the following bond value would increase: a callable bond, a putable bond, a convertible bond, and an exchangeable bond? List all correct answer(s).

3. The real risk-free rate is 3%, and inflation is expected to be 4% for the...

3. The real risk-free rate is 3%, and inflation is expected to be 4% for the next 2 years. A 2-year Treasury security yields 8.3%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place. 4. Renfro Rentals has issued bonds that have a 9% coupon rate, payable semiannually. The bonds mature in 6 years, have a face value of $1,000, and a yield to maturity of 7.5%. What is the price of...

A non-dividend paying stock has a price of $100. A 3 month Eurpoean call option on...

A non-dividend paying stock has a price of $100. A 3 month Eurpoean call option on the stock with a strike of $95 is worth $9.90. Similarly, a 3 month European put option with the same strike is worth $3.80. If the continuously compounding interest rate is 5% per annum, is there an arbitrage opportunity? If so, how could you set up a portfolio to make a profit from it now (not having to wait for 3 months), and how...

Bond maturity 4 Years initial interest rate = 4.00% Coupon Rate 5.00% Annual Coupon Face Value...

Bond maturity 4 Years initial interest rate = 4.00% Coupon Rate 5.00% Annual Coupon Face Value $1,000.00 Dollar Coupons $50.00 Given the information in the table, what is the reinvestment effect in year 4 if the interest rate changes from 4.00% to 6.00% ?

Question