Question

If IBM offers 30 year bonds with a 4.875 coupon payment, how much would you receive every six months? (4 pts) ____________

5b. Now if two years later (say 2022) interest rates in the economy are higher and new corporate bonds are offering a 5.25 coupon payment, what happens to the price of IBM bonds in the secondary market? Explain. (4 pts.)

Answer 1

5a. Considering face value of $1000,

Coupon payment = $1000*0.04875/2 = $24.375

5b. As now the new corporate bonds are giving coupons of 5.25% which is higher than 4.875% of IBM, the demand for IBM bonds will decrease and hence the price of IBM bonds will decrease in the secondary market. It can also be explained by taking 5.25% as the market yield, and as we know, the price of the bond decreases as yield to maturity increases.

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