Question

Paomi Inc. invested in a 5-year annual coupon bond two years
ago. The face value of the bond is $1000 and the annual coupon rate
is 6%. The interest rate (or the required rate of return) of the
bond was 7% two years ago when Paomi purchased the bond. If the
interest rate (or the required rate of return) of the bond goes
down to 6.5% now, which of following is **FALSE**?

Group of answer choices

A) This example shows the effect of interest rate risk on Paomi’s assets.

B) The bond price now is $986.76.

C) The reinvestment return of the coupon is 6%.

D) A decrease in interest rate affects both bond price and reinvestment return of coupon.

Answer #1

The requires rate of return i.e. Yield goes down to 6.5% from 7%.

Since there is decrease in yield of the bond which means price of bond will increase as price of bond is inversly proportion to yield of bond. Also, The reinvestment return on coupon is the required rate if return i.e. yield on the bond.

Therefore this example shows the effect of interest rate risk on Paomi's asset. Aloso, decrease in interest rate affects both bond price and reinvestment return of coupon.

Hence option(A) and option (D) is True.

New Bond price:

P= 60/(1+6.5%) + 60/(1+6.5%)^{2} +
1060/(1+6.5%)^{3}

P = 56.3380 + 52.8996 + 877.5200 = 986.76

Hence option(B) is True.

The reinvestment return on coupon is the required rate if return
i.e. yield on the bond. In this case reinvestment return on coupon
is 6.5%. **Hence, option(C) is FALSE**

Suppose that a $100 face value 10 year bond that has an annual
7% coupon and the market rate of interest is 6.5%. How much will
the price of this bond change in percentage terms if the interest
rate falls to 6.0%?
Increase by 3.64%
Increase by 5.00%
Increase by 3.54%
Decrease by 5.00%

You purchased a $1000 face value zero-coupon bond one year ago
for $246.85. The market interest rate is now 6.81 percent. If the
bond had 17 years to maturity when you originally purchased it,
what was your total return for the past year? Assume semiannual
compounding. Answer as a percentage to two decimals (if
you get -0.0435, you should answer -4.35).

Suppose, two years ago, you purchased a 10-year coupon bond
paying 4.5% interest annually with a face value of $1000. It is now
two years later and you just received an interest payment yesterday
(the bond matures in exactly eight years). You look in the paper
and the yield on comparable debt is 4.25%. What is the bond
currently worth?
Group of answer choices
$1,017
$976
$1,135
none of them
$1,060

What is the price of a $1000 face value zero-coupon bond with 4
years to maturity if the required return on these bonds is 3%?
Consider a bond with par value of $1000, 25 years left to
maturity, and a coupon rate of 6.4% paid annually. If the yield to
maturity on these bonds is 7.5%, what is the current bond
price?
One year ago, your firm issued 14-year bonds with a coupon rate
of 6.9%. The bonds make semiannual...

One
year ago you purchases a 7 percent semi annual coupon bond with a
face value of $1000 and a yeild to maturity 6.8% when it was
selling for 102.5% of par. today you sold this bond the bond has
seven years to maturity and yeild to maturity of 5.2 percent what
is your total dollar return on this investment?

Orange District Hospital issued a 30-year, 10 percent annual
coupon bond (par value $1,000) two years ago. The bond now has 28
years remaining to maturity and sells for $1,400. The bond has a
call provision that allows the hospital to call the bond in ten
years at a call price of $1,100. If an investor expects a call and
requires a 6.5 percent rate of return, will the investor be likely
to purchase the bond? Explain your answer

2 years ago, a company issued a 10-year, 9% coupon bond with a
face value of $1000. The bond makes quarterly coupon payments.
Today, the bond yields APR of 10% compounded semi-annually. What is
the price of the bond today?

A. Two years ago, you purchased a new10-year bond issued by
APPLE with a face value of $1,000 and coupon interest rate of 3%.
Given the current crisis, bonds of equal risk and maturity are now
2%, so you decide to sell the bond. Calculate the selling price (4
points).
B. Calculate the Annualized HPR from your investment (2).

A 10 year Treasury bond with face value of $1000 is currently
offering 8% annual coupon rate and 6% yield to maturity. Which of
the following statements about the bond is NOT true?
The market price of bond is higher than $1000.
A year from now if the yield to maturity stays the same, the
market price of the bond will be higher than what it is today.
If you buy the bond today and hold it until the bond...

A coupon bond pays annual interest, has a par value of $1,000,
matures in 12 years, has a coupon rate of 8%, and has a yield to
maturity of 7%.
1) Calculate the price of the bond and the Current Yield.
2) The Macaulay Duration for this bond is 8.29
years, then what is the
Modified Duration?
3) Suppose you sell the bond at $1000 two years later. The
reinvestment return
during these two years is 6%. What is the...

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