Question

**Suppose you buy a 7 percent coupon, 20-year bond today when it is first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why? Illustrate your explanations with a graph.**

Answer #1

**Bond valuation** is the determination of the fair
price of a bond. As with any security or capital investment, the
expected value of a bond is the present value of the stream of cash
flows it is expected to generate. Hence, the value of a bond is
obtained by discounting the bond's expected cash flows to the
present using an appropriate discount rate.

If after the date of issue, interest rate increases, future cash flows will now be discounted at a higher rate thereby decreasing the value of the bond. Hence the value of the bond will go deep in discount. Hence price of 7% Coupon 20 year bond will reduce if the interest rate increases to 15%.

You buy a 7 percent coupon, 10-year maturity bond, which was
issued in 2015. The yield to maturity is 6 percent. a) Is this a
discount or a premium bond? Explain your answer! (4 points) b) What
is the price of the bond today (in 2017)? (4 points) c) Tell
(without any calculation) the price at which the bond would trade
if today the yield to maturity would be exactly 7%. Support your
answer. (7 points)

You buy a 7 percent coupon, 10-year maturity bond, which was
issued in 2015. The yield to maturity is 6 percent. a) Is this a
discount or a premium bond? Explain your answer! (4 points) b) What
is the price of the bond today (in 2017)? (4 points) c) Tell
(without any calculation) the price at which the bond would trade
if today the yield to maturity would be exactly 7%. Support your
answer.

You buy a 7 percent coupon, 10-year maturity bond, which was
issued in 2015. The yield to maturity is 6 percent.
a) Is this a discount or a premium bond? Explain your answer! (4
points)
b) What is the price of the bond today (in 2017)? (4 points)
c) Tell (without any calculation) the price at which the bond would
trade if today the
yield to maturity would be exactly 7%. Support your answer.

Suppose you buy a bond with a coupon of 7.1 percent today for
$1,000. The bond has 16 years to maturity. Two years from now, the
YTM on your bond has increased by 2 percent, and you decide to
sell. What is the percentage realized rate of return? Assume that
interest payments are reinvested at the original YTM. The bond pays
coupons twice a year. (Do not round intermediate calculations.
Round your answer to 2 decimal places.)

Suppose that today you buy a bond with an annual coupon rate of
8 percent for $1,060. The bond has 15 years to maturity. Assume a
par value of $1,000. Two years from now, the YTM on your bond has
increased by 1 percent, and you decide to sell. Assume semiannual
compounding periods. What price will your bond sell for after 2
years?
In Excel Please

Suppose that today you buy a bond with an annual coupon rate of
8 percent for $1,060. The bond has 15 years to maturity. Assume a
par value of $1,000. Two years from now, the YTM on your bond has
increased by 1 percent, and you decide to sell. Assume semiannual
compounding periods. What price will your bond sell for after 2
years?
In Excel Please

1. Suppose you buy a 30 year bond that pays a 6% coupon
for the first 15 years and a 8% coupon for the last 15 years. The
YTM of this bond is 7%. What is the price of the bond?
2. Suppose you buy a 6 year 12% bond that has a YTM of
9%. What is the price of the bond?

You enter into a forward contract to buy a 10-year, zero coupon
bond that will be issued in one year. The face value of the bond is
$1,000, and the 1-year and 11-year spot interest rates are 5
percent and 7 percent, respectively.
What is the forward price of your contract?
Suppose both the 1-year and 11-year spot rates unexpectedly
shift downward by 2 percent. What is the new price of the forward
contract?

Suppose you buy a 30 year bond that pays a 6% coupon for the
first 15 years and a 8% coupon for the last 15 years. The YTM of
this bond is 7%. What is the price of the bond?
（please provide formula）

1. Ahmad Corp. just issued ten-year bonds that make annual
coupon payments of $50. suppose you purchased one of these bonds at
par value ($1,000) when it was issued. Right after your purchase,
market interest rates jumped, and the YTM (interest rate) on your
bond rose to six percent. What is the new price of you bond?
2. Assume a bond matures for $1000 six years from today and has
a 7% coupon rate with semiannual coupons. What is the...

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