bond problems - (b) Notice this bond is selling at a...

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Finance 254 Bond Valuation Consider a bond with the following description : - Par value of $1000 - 12 years to maturity - Coupon rate of 5.675% [annual coupon payments] (a) If this bond is selling for $952.45, what is the yield to maturity? (b) If the yield to maturity changes to 5.75%, what is the price of the bond? (c) Based on (a) and (b), how do decreases in interest rates affect bond prices? (d) If the yield to maturity is 6.25%, but the bond matures in 11 years, what is the price of bond? (e) Based on (a) and (d), how do you think the price of a bond affected by the passage of time? 1 Also Recommended : Problems From Textbook, Chapter 7 – 7, 8, 10 From the Money & Investing section of The Wall Street Journal © 2003 Brian J. Henderson & Joseph M. Marks
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2 Take a look at the bond quote on the previous page and use the information you see to answer the following questions: (a) What is the yield to maturity on this bond?
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Unformatted text preview: (b) Notice this bond is selling at a premium; why? (c) The closing price for Monday is 107.13. If the close price on Tuesday is 106.32, did the required rate of return on this bond increase or decrease? What is the new required rate of return? (d) If the yield to maturity is the same as part (a), but the length to maturity shortens to 7 years, what happens to the price? What is the new price? (e) Based on (d) from this question and (e) from Problem 1, what is the relationship between bond prices and the passage of time? 3 Here is another bond quote from the same day: (a) What is the duration of this bond? (b) Is this bond more or less sensitive to changes in interest rates when compared to a bond that has a duration of 4? (c) Does this bond have more or less reinvestment risk when compared to a bond that has a duration of 4, all else equal? 2003 Brian J. Henderson & Joseph M. Marks...
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This note was uploaded on 10/10/2009 for the course FIN Fin335 taught by Professor Tomjanson during the One '03 term at University of New England.

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bond problems - (b) Notice this bond is selling at a...

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