(Bond valuation) You are examining three bonds with a par value of $1,000 (you receive $1,000...

(Bond valuation) You are examining three bonds with a par value of $1,000 (you receive $1,000 at maturity) and are concerned with what would happen to their market value if interest rates (or the market discount rate) changed.

The three bonds are

Bond Along dash—a bond with 33 years left to maturity that has an annual coupon interest rate of 12 percent, but the interest is paid semiannually.
Bond Blong dash—a bond with 11 years left to maturity that has an annual coupon interest rate of 12 percent, but the interest is paid semiannually.
Bond Clong dash—a bond with 17 years left to maturity that has an annual coupon interest rate of 12 percent, but the interest is paid semiannually.

What would be the value of these bonds if the market discount rate were
a. 12 percent per year compounded semiannually?
b. 3 percent per year compounded semiannually?
c. 16 percent per year compounded semiannually?
d. What observations can you make about these results?

Expert Solution

Additionally in d, you can also see that more is the maturity period, higher or lower is the bond price when YTM is less or more than coupon rate. This implies price of a bond is more sensitive to YTM when maturity of a bond is higher.

jeff jeffy answered 11 months ago

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