Question

a) You are considering two bonds. Bond A has a 6% annual coupon while Bond B has a 5% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

	a.	The price of Bond A will decrease over time, but the price of Bond B will increase over time.
	b.	The prices of both bonds will decrease over time, but the price of Bond A will increase at a faster rate.
	c.	The prices of both bonds will change.
	d.	The price of Bond B will decrease over time, but the price of Bond A will increase over time.
	e.	The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate.

b) Lauren Company's bonds mature in 10 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 6.1% on these bonds. What is the bond's price?

	a.	$1,136.21
	b.	$1,029.30
	c.	$1,386.53
	d.	$1,236.43
	e.	$1,259.94

Answer 1

Question 1)

Part A is the correct answer.

Since YTM is more than coupon rate of both the bonds, therefore price of both the bonds will increase with time. Coupon rate of Bond A is less than Coupon rate of Bond B, therefore price of Bond A will increase at fast rate.

Question 2)

Part b is the correct answer

Bond Price = [Coupon amount * PVAF (6.1%, 10years)] + [Maturity amount * PVF (6.1%, 10 years)]

= [$65 *7.325] +[$1,000 * 0.553]

=$1,029.30

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