Question

answer with 100 words

1. A company has an outstanding issue of $1,000- par-value bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date. Describe the two possible reasons why similar-risk bonds are currently earning a return below the coupon interest rate on the ABC bond.

2. Do you think it is a good idea to have a negative beta asset (e.g. a stock) in your portfolio during a crisis like the Covid-19? Discuss.

3. Discuss the relationship between bond value and required rate of return

Answer 1

1) Two possible reasons are as follows:

i. similar bonds might have a premium issue or trading price i.e., at a price higher than their face value or at a price higher than the price of ABC bonds.

ii. Similar bonds could be paying coupon amount at longer time intervals than ABC bonds.

2) Yes, it is good ides to have a negative Beta asset during crisis times. Negative Beta assets perform opposite to market movements. If markets are in a downtrend, then these asset prices move upwards by which more profits can be booked.

3) There is an inverse relationship between bond value and required rate of return. If the required rate of return is high, bond value will be less and vice versa.

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