Question

A bond with 9 years to maturity and a coupon rate of 7.5% has a par, or face, value of $1,000. Interest is paid semi-annually.

1. If you required a return of 6% on this bond, what is the value of this bond to you? (3 points)
2. Compare the basic characteristics of Eurobonds and Local bonds. (2 Points)
3. If the required return on a bond differs from its coupon interest rate, describe the behavior of the bond value over time as the bond moves toward maturity. (3 Ponts)

Answer 1

value of bond is present value of cash flows from the bond

face value = 10003

coupon rate is 7.5% sosemiannual coupon is 1000*7.5%/2 = 37.5

per period required rate is 3%

years to maturity is 9

value is

37.5(pvifa 3% 18 P) + 1000/(1.03)^18

= 37.5(13.7535) +587.39

= 1103.15

B) The basic charecter of euro bond is it is issued in other currency than the home currency. they are also called as external bonds. Local bonds are issued in home currency

c) when required rate is diffrent from coupon rate of the bond then the bond will be sold at premium or discount as term to maturity reduces the premium or discount on the bond will keep reducing and on the day of maturity they will be equal to face value