Question

Rocket Exterprices has a 20-year bond issue outstanding that pays a 4% coupon. The bond is currently priced at $1,205.60 and has par value of $1,000. The bond also pays coupons semiannually. You just purchase ten of them as an investment.

1.) What is the yields to maturity of the bond you hold?

2.) Five years fo by interest rates in the economy goes up by 3% and Rocket Enterprises' bonds YTM also rises by 3%. Unfortunately, you desperately need cash and will have to sell your bonds. Your friend offers $885.00 for each bond. Would you sell to your friend? Why?

Answer 1

a)

• As the compounding is semiannual, the rate function is multiplied by 2.
• As the price was the amount paid to acquire the bond, it is an outflow and therefore represented by negative values while the coupon and the maturity value are inflows and therefore represented by positive signs

b) Price if the YTM rises

after 5 years pass there are only 15 years left to maturity. As the price is 833.07 nad the friend is offering 885, you should sell because you would only get 833.07 from the market and teh friend is giving you more.