Green line: ( Smith, Irwin, or Johnson) Blue line: ( Johnson, Irwin, or Smith )
ID: 2790918 • Letter: G
Question
Green line: ( Smith, Irwin, or Johnson) Blue line: ( Johnson, Irwin, or Smith)Question that Wasn’t in the pic: “Irwin’s bonds have exhibited a substantial trading volume in the past few years. It’s Bonds would be referred to as a ( seasoned or new issue) 3. Bond yields and prices over time Aa Aa A bond investor is analyzing the following annual coupon bonds: Issuing Company Johnson Enterprises Smith Incorporatecd Irwin Metalworks Annual Coupon Rate 6% 12% 996 Each bond has 10 years until maturity and has the same risk. Their yield to maturity (YTM) is 9%. Interest rates are assumed to remain constant over the next 10 years. Label the curves on the following graph to indicate the path that each bond's price, or value, is expected to follow. BOND VALUE IS 1200 1100 1000 900 800 700 10 YEARS TO MATURITY Based on the preceding information, which of the following statements are true? Check all that apply All of the bonds will have the same value when they reach maturity. The expected capital gains yield for Johnson's bonds is positive. Smith's bonds are a better investment than Johnson's bonds. Irwin's bonds are a better investment than Smith's bonds.
Explanation / Answer
1. True statements are as follows:
a) All of the bonds will have the same value when they reach maturity.
b) Smith's bonds are a better investment than Johnson's bonds.
2. Orange line: Johnson Enterprises(coupon rate is less than the YTM.)
Green line: Irwin metalworks(coupon rate is equal to YTM)
Blue line: Smith Incorporated (coupon rate ie greater than YTM)
3. The required bonds could be referred as Seasoned issue as the bonds have already been trading in past with good volumes.
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