Chapter #15-Bonds Eric purchased the following bond at par value (face value): .

Question

Chapter #15-Bonds Eric purchased the following bond at par value (face value): .Face Value $1,000 . Coupon Rate 5% Maturity 20 years Interest paid semi-annual Question #1 What is Eric entitled to receive each year? Question #2 Assume that 5 years later, interest rates in the market increase If Eric sells it, will he get more or less than face value? ess Assume that Jessica buys the bond from Eric for $940. How much is she entitled to receive each year? What is her annual yield? Question #3 Assume that 5 years later, interest rates in the market decrease: If Eric sells it, will he get more or less than face value? Assume that Jessica buys the bond from Eric for $1,060. How much is she entitled to receive each year? What is her annual yield? .

Explanation / Answer

1). Eric entitled to receive each year = $1000 * 5% = $50

2). If market rate inceases then Eric will get less than the face value because market will give higher return than this bond.

If Jessica buys from Eric at $940.
She is entitled to receive each year = $1000 * 5% = $50.
Annual yeild = $50 / $940 = 0.05319 or 5.32%

3). If market rate decreases then Eric will get more than the face value because market will give lower return than this bond.

If Jessica buys from Eric at $1060
She is entitled to receive each year = $1000 * 5% = $50.
Annual yeild = $50 / $1060 = 0.04716 or 4.72%

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