Two bonds have identical times to maturity and coupon rates. One is callable at

Question

Two bonds have identical times to maturity and coupon rates. One is callable at 114, the other at 119. Which should have the higher yield to maturity? 1. The bond callable at 114 should have the higher yield to maturity. The bond callable at 119 should have the higher yield to maturity 2, Treasury bonds paying an 9.25% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Coupon rate 3. Suppose that today's date is April 15, A bond with a 9% coupon paid semiannually every January 15 and July 15 is listed in The Wall Street Journal as selling at an ask price of 1,012.500. If you buy the bond from a dealer today, what price will you pay for it? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Invoice price

Explanation / Answer

Problem 1:

Price of bonds is given by

P = C/(1 + y) + C/(1 + y)^2 + … + C/(1 + y)^N + 114/(1 + y)^N

P = C/(1 + r) + C/(1 + r)^2 + … + C/(1 + r)^N + 119/(1 + r)^N

Higher future values should be discounted at higher rate. r > y

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