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A bond has the following features: Principal amount Coupon rate Maturity Sinking fund Call feature GH¢1000 11.5% 10 years None After two years Call penalty One year's interest a) If comparable yields are 12 percent, what should be the price of this bond? b) Would you expect the firm to call the bond if yields are 12 percent? c) If comparable vields are 8 percent, what should be the price of the bond? 5.

A bond has the following features: Principal amount Coupon rate Maturity Sinking fund Call feature GH¢1000 11.5% 10 years None After two years Call penalty One year's interest a) If comparable yields are 12 percent, what should be the price of this bond? b) Would you expect the firm to call the bond if yields are 12 percent? c) If comparable vields are 8 percent, what should be the price of the bond? 5.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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A bond has the following features: Principal amount Coupon rate Maturity Sinking fund Call feature 5. GH¢1000 11.5% 10 years None After two years Call penalty One year's interest a) If comparable yields are 12 percent, what should be the price of this bond? b) Would you expect the firm to call the bond if yields are 12 percent? c) If comparable yields are 8 percent, what should be the price of the bond? d) Would the firm call the bond today if yields are 8 percent? e) If you expected the bond to be called after three years, what is the maximum price you would раy for the bond if the current interest rate is 8 percent? 1 The prices of longer-term bonds are more volatile than the prices of shorter-term bonds with the same coupon. The prices of bonds with smaller coupons are more volatile than bonds with larger coupons for the same term to maturity. However, you cannot compare the relative price changes on bonds with different coupons and maturities unless you consider their durations. Consider the following GH¢1000 par value bonds when the current interest rate is 8 percent: 6. Bond Coupon Term Duration A 8% 8 6.2 years B 0% ? 14% 10 ? Compute the duration for bonds B and C, and rank the three bonds on the basis of their price volatility. Suppose we have two different bonds (Bond A and Bond B) on the same market with their par values, coupon payments and maturity periods described as follows: 7. Bond A: Maturity 16 years Bond B: Maturity 9 years $1000 $1000 10% 20% If the market interest rate is currently 15%, calculate the (i) current yield, (ii) capital gain/loss yield and (iii) total yield on each of the two bonds. What generalizations can be made from your results in both cases?
Transcribed Image Text:A bond has the following features: Principal amount Coupon rate Maturity Sinking fund Call feature 5. GH¢1000 11.5% 10 years None After two years Call penalty One year's interest a) If comparable yields are 12 percent, what should be the price of this bond? b) Would you expect the firm to call the bond if yields are 12 percent? c) If comparable yields are 8 percent, what should be the price of the bond? d) Would the firm call the bond today if yields are 8 percent? e) If you expected the bond to be called after three years, what is the maximum price you would раy for the bond if the current interest rate is 8 percent? 1 The prices of longer-term bonds are more volatile than the prices of shorter-term bonds with the same coupon. The prices of bonds with smaller coupons are more volatile than bonds with larger coupons for the same term to maturity. However, you cannot compare the relative price changes on bonds with different coupons and maturities unless you consider their durations. Consider the following GH¢1000 par value bonds when the current interest rate is 8 percent: 6. Bond Coupon Term Duration A 8% 8 6.2 years B 0% ? 14% 10 ? Compute the duration for bonds B and C, and rank the three bonds on the basis of their price volatility. Suppose we have two different bonds (Bond A and Bond B) on the same market with their par values, coupon payments and maturity periods described as follows: 7. Bond A: Maturity 16 years Bond B: Maturity 9 years $1000 $1000 10% 20% If the market interest rate is currently 15%, calculate the (i) current yield, (ii) capital gain/loss yield and (iii) total yield on each of the two bonds. What generalizations can be made from your results in both cases?
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