Question

1. A 15-year bond is issued with a face value of $10,000, paying interest of $750 a year. If yields to maturity in the market increase shortly after the bond is issued, what happens to the bond’s:

a. Coupon rate?

b. Price?

c. Yield to maturity?

2. A 10-year bond with a face value of $1,000 pays a coupon of 6% per year (3% of face value every six months). The reported yield to maturity is 5.5% per year (a six-month discount rate of 5.5/2 = 2.75%). What is the present value of the bond?

Answer 1

1a). Coupon rate = 7.5% which remains unchanged.Coupon payments are fixed at $750/year.

b). When the market yield increases,the bond price will fall.The cash flows are discounted at a higher rate.

c). At a lower price, the bond’s yield to maturity will be higher. The higher yield to maturity for the bond is commensurate with the higher yields available in the rest of the bond market.

2). To find the bond's current price, we need to put the following values in the financial calculator;

INPUT	10*2=20	2.75		3%*1,000=30	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-1,038.07

Hence, Bond's Present Value = $1,038.07