Illustrate your answers by graphing bond prices versus YTM What does this

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Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer maturity bond? #3: Bond J is a 4 percent coupon bond; Bond K is a 12 percent coupon bond. Both bonds have nine years to maturity, make semiannual payments, and have a YTM of 8 percent. If interest rates suddenly rise by 2 percent, what is the percentage change of these bonds? What if rates suddenly fall by 2% instead? What does this problem tell you about the interest rate risk of lower-coupon bonds? #4: Suppose your company needs to raise \$30 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you’re evaluating two issue alternatives: an 8 percent semi-annual coupon bind and a zero coupon bond. Your company’s tax rate is 35 percent. a. How many of the coupon bonds would you need to issue to raise the \$30 million? How many of the zeros would you need to issue? b. In 30 years, what will your company’s repayment be if you issue the coupon bonds? What if you issue the zeros?

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• Winter '14
• Zero-coupon bond, Bond Dave

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