Question

if interest rate is expected to fall (rise) the best bond strategy is to own low (high) coupon and long (short) maturity bonds?

a. true

b. false

c. uncertain

jordan plans to issue bonds with a par value of $1,000. 10 years to maturity and 10% cupon rate. bonds of similar risk are currently selling to yield an 8 percent rate of return. if its coupon payments are paid semi-annually, what is the market value of each bond?

a. $1,198.67

b. $1,245.74

c. $1,228.31

d. $1,135.90

a bond with a $1,000 par value, a 10% coupon rate paid semi-annually and 5 years to maturity is currently selling for $800. what is the yield to maturity for this bond?

a. 12.68%

b. 10%

c. 13.88%

d. 15.96%

Answer 1

First question:

Yes it's true,if interest rate is expected to fall (rise) the best bond strategy is to own low (high) coupon and long (short) maturity bonds.

Second question:

Market value of bond =>

Coupon rate semi annual- 10/2 = 5%

Maturity period- 10×2 = 20 years

Value = $50× 9.818 (grand total of (1.08)^20) +$1000×(1.08)^20

= $50×9.818+$1000×0.2145

= $490.90+$214.5

= $705.40

Third question:

Yield to maturity=>

C+(F-P)/n /F+P/2, where c is coupon/interest payment; F is face value; P is price; n is number of years

Years to maturity will be 10 years (semi annual)

Coupon if semi annual will be $1000×5% = $50

= $50+(1000-800)/10/1000+800/2

= $50+200/10/1600/2

= $50+$20/800

= $70/800

= 0.0875

=> 8.75%