Question

**Consider a 20-year bond with an annual coupon of 10%.
The coupon rate will remain fixed until the bond matures. The bond
has a yield to maturity of 8%. Which of the following statements is
correct?**

**1) The bond should currently be selling at its par
value.**

**2) If market interest rates decline, the price of the
bond will also decline.**

**3) If market interest rates remain unchanged, the bond’s
price one year from now will be higher than it is
today.**

**4) The bond is currently selling at a price below its
par value.**

**5) If market interest rates remain unchanged, the bond’s
price one year from now will be lower than it is
today.**

Answer #1

The correct statement is Option 5 "**If market interest
rates remain unchanged, the bond’s price one year from now will be
lower than it is today"**

**Explanation:** The Bond price is calculated by
the discounted cash flows of all the earnings that the bond is
going to generate over the periods. When the Yield rate is lower
than coupon rate, then the value of the bond will be higher than
face value as the discount rate we use is yield rate and the
present value of bond or discounted cash flow will be higher than
face value. but as the years to maturity will approach the gap
between the market value and face value will start diminishing.

The bond should be currently selling at higher price than face value, It cannot go below the face value when the coupon rate is higher than yield. Therefore, Options 1 & 4 are wrong and when the interest rate gets lower than the bond price will increase, therefore option 2 is wrong.

A 10-year bond with a 8% annual coupon has a yield to maturity
of 9%. Which of the following statements is CORRECT?
a. The bond’s current yield is greater than 9%.
b. If the yield to maturity remains constant, the bond’s price
one year from now will be higher than its current price.
c. The bond is selling above its par value.
d. If the yield to maturity remains constant, the bond’s price
one year from now will be lower...

A bond has a 10 percent coupon rate, makes annual payments,
matures in 12 years, and has a yield-to-maturity of 7 percent.
1. Given this: a. What is the price of the bond today? b. What
is the bond’s current yield? c. Based on the yield-to-maturity and
the current yield, what is the bond’s expected capital gains yield
over the next year?
2. One year from now the bond will have 11 years until maturity.
Assume market interest rates remain...

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...

Consider a 7-year semi-annual bond with an annual coupon rate of
9% and a bond equivalent yield (BEY) of 12%. If interest rates
remain constant, one year from now the bond’s price will be
__________.
None of the above.
It depends if it is a semi-annual or an annual bond.
Higher.
The same.
Lower.

A bond has a 10 percent coupon rate, makes annual payments,
matures in 12 years, and has a yield-to-maturity of 7 percent.
One year from now the bond will have 11 years until maturity.
Assume market interest rates increase to 9 percent. Given this: g.
What will be the bond’s price one year from now? h. If you
purchased the bond at the price in (a) and sold the bond at the
price in (g) what would be your capital...

A 10-year corporate bond has an annual coupon payment of 5.3%.
The bond is currently selling at par ($1,000). Which of the
following statement is not correct? Why?
The bond’s capital gain yield is 5.3%.
The bond’s yield to maturity is 5.3%.
The bond’s current yield is 5.3%.
If the bond’s yield to maturity remains constant, the bond’s
price will remain at par.

a. Consider a coupon bond that pays interest of $60 annually,
has a par value of $1,000, matures in 2 years, and is selling today
at a price of $1000. What is the yield to maturity on this
bond?
b. Consider a zero-coupon bond with a par value of $1,000 that
costs $500 and matures in ten years. What is the yield to maturity
on this bond? Give the formula, and solve.
c. For the bond in part (b) above,...

Consider a bond paying a coupon rate of 8% per year semiannually
when the market interest rate is only 5%. The bond has twenty years
until maturity.
Find the bond’s price today.
Find the bond’s price six months from now after the next coupon
is paid if the interest rate rises to 7%.
What is the total rate of return on the bond?

General Mills has a $1,000 par value, 10-year to maturity bond
outstanding with an annual coupon rate of 7.89 percent per year,
paid semiannually. Market interest rates on similar bonds are 11.30
percent. Calculate the bond’s price today.

A 15-year bond with a face value of $1,000 currently sells for
$850. Which of the following statements is CORRECT?
The bond’s coupon rate exceeds its current yield.
The bond’s current yield exceeds its yield to maturity.
The bond’s yield to maturity is greater than its coupon
rate.
The bond’s current yield is equal to its coupon rate.
If the yield to maturity stays constant until the bond matures,
the bond’s price will remain at $850.

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