Answers week 1.docx - 5-3 The rate of return on a bond held...

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5-3 The rate of return on a bond held to its maturity date is called the bond’s yield to maturity. If interest rates in the economy rise after a bond has been issued, what will happen to the bond’s price and to its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond’s price? Why or why not? A: If interest rates increase after a bond has been issued, the market value of the bond will decrease. Investors can earn the higher yields on alternative investments with similar risk, and thus they will only buy previously issued bonds if their prices have declined to the point where the yields to maturity on the outstanding bonds are equal to the yields on similar risk alternative investments. Everything else equal, the market prices of bonds with longer terms to maturity will change more than the prices of bonds with shorter terms to maturity For investors who bought these bonds prior to the interest rate increase and plan to hold them till maturity, there will be no change in YTM. The YTM will change only for investors who buy these bonds after the interest rate change. If interest rate goes up – YTM will go up but the bond price will go down If the length of time to maturity is high – the bond price will see more decrease. b. Problems: 5-1, Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 9%. What is the current market price of these bonds?
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