Answer the following questions dealing with bonds a. What is the major determina
ID: 2647183 • Letter: A
Question
Answer the following questions dealing with bonds
a. What is the major determinant of bond prices? Explain your answer (2)
b. The ABC bond carries a 6.5% semi-annual coupon rate and matures in 23 years. If the market yield on these bonds is 8%, calculate the price of the bond. (3)
c. If interest rates (yields) do not change in the marketplace, explain what happens to the price on a discounted bond as time goes by. Explain why that occurs. (2)
d. If John purchased the bond at $1,050, what would his yield to maturity be if the stated rate is 6% (compounded semi-annually) and maturity 10 years? (3)
Explanation / Answer
Answer A.
Major determinants of Bond Prices are: -
Answer B.
Formula for Price of a bond
c
Coupon rate: -
6.5%
Semiannually
3.25%
r
Market yield
8.0%
Semiannually
4.00%
t
Period (Years)
23
Semiannually
46
f
Assuming Face Value of bond
$1,000
Price of the Bond
$ 843.37
Answer C.
PP
Purchase Price
$1,050
R
Rate
6.0%
Semiannually
3.00%
T
Maturity Years
10
F
Assuming Face Value of bond
$1,000
Gain or discount (PP-F)
$50
Annualized Gain
$5
Annual interest paid
$30.00
Total annulaized return
$35.00
Yield
3.50%
$995
Yield
3.52%
Yield to maturity
3.51%
c
Coupon rate: -
6.5%
Semiannually
3.25%
r
Market yield
8.0%
Semiannually
4.00%
t
Period (Years)
23
Semiannually
46
f
Assuming Face Value of bond
$1,000
Price of the Bond
$ 843.37
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