Pacific Amalgamated (PA) issues 10-year bonds in 2011 with a $1,000 face value a
ID: 1146984 • Letter: P
Question
Pacific Amalgamated (PA) issues 10-year bonds in 2011 with a $1,000 face value and a $150 coupon. The interest rate at which PA issues these bonds is _____. When the bond reaches maturity in 2021, how much will each investor holding one of these PA bonds receive?
A.)The initial investment of $1,000 plus $150 for the 10th coupon
B.) The initial investment of $1,000 plus $1,500 worth of coupons ($150 per year x 10 years)
C.) $1,500 worth of coupons ($150 per year x 10 years)
Suppose interest rates rise dramatically. The market price of these PA bonds will _____ (increase/decrease/stay the same --select one).
Explanation / Answer
Coupon paying bonds always receive the coupons with the frequency decided for instance (annually ,semi annually) etc.
In this case this bond will provide 10 coupons for 10 years to its holders and initial investment therefore 1000 and 10 coupons of 150 each hence option B is correct response.
Interest rate and price of bond has inverse relation therefore if price rises rate decreases and vice versa.
Correct response is Decrease
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