Consider a 3-year coupon bond with a face value of $1.000 and a coupon rate of 1

Question

Consider a 3-year coupon bond with a face value of $1.000 and a coupon rate of 10 percent. Mr. mith purchased this bond at par (i.e, he paid Pt $1,000) when it was newly issued. The marke interest rate at the time the coupon bond was issued was 10 percent. One year from the time of the bond's issue, he decides to sell the bond, ie, the holding period is one year. At that time, the market interest rate has risen to 20 percent. (1) (20 points) Set up the equation you will need to solve to find the price that Mr. Smith will obtain when he sells the bond, Pti. You do not have to solve for the actual price he gets (2) (30 points) Pt.1 will be greater than Pt. Is this statement TRUE, FALSE, or UNCERTAIN? Circle the right answer. Explain your answer below in no more than one sentence. (3) (30 points) The rate of return will be less than the current yield of 10 percent. Is this statement TRUE FALSE, or UNCERTAIN? Circle the right answer. Explain your answer below in no more an one sentence. (4) (20 points) If Mr. Smith held the bond till maturity, what would his rate of return be? Why? If he neld the bond vn! mewity then his retorn ouid loe oo because thet is ht ne ous the bond

Explanation / Answer

Answer
1
Selling price=FV-(FV*IR-FV*CR)
IR=Market interest rate
CR
coupon Rate

2
The statement is false
because the market interest rate rised so that the demand for 10% coupon decreses so the bond have to sell at lower value.

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