b)Assume a 10-year, $1,000 parvalue bond with a 10 percent annual coupon if its required rate of return is 10 percent what is the value of the bond? i) What would be the value of the bond described in part b if, just after it had been issued, the expected inflation rate rose by 3 percentage points? Would we now have a discount or a premium bond? ii) What would happen to the bonds' value if inflation fell, by 3 %? Would we now have a premium or a discount bond?

b)Assume a 10-year, $1,000 parvalue bond with a 10 percent annual coupon if its required rate of return is 10 percent what is the value of the bond? i) What would be the value of the bond described in part b if, just after it had been issued, the expected inflation rate rose by 3 percentage points? Would we now have a discount or a premium bond? ii) What would happen to the bonds' value if inflation fell, by 3 %? Would we now have a premium or a discount bond?

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

Problem 1PS

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Similar questions

What would happen to the values of the 12%, 15%, and 7% coupon bonds over time if the required return was 9%?
Consider two bonds, a 3-year bond paying annual coupons at 5% and a 10-year bond also paying annual coupons at 5%. Coupons are paid annually (not semiannually). Both are currently trading at par (i.e., price = face value). A. What must be the current discount rate for these bonds? B. Suppose that the discount rate for these bonds suddenly rise to 9%. What is the new price of the 3-year bond? What is the new price of the 10-year bond? C. Compare the price changes (i.e., the current price of $1,000 vs. the new bond price from Part B) of two bonds. Determine whether long-term or short-term bonds are more sensitive to interest rate fluctuation.
The bond J is a bond with a coupon rate of 4%. The bond K is a bond with a coupon rate of 10%. Both bonds have a maturity of 8 years, make semi - annual payments, and have a yield to maturity of 9%. If interest rates suddenly increase by 2%, what is the percentage change in the price of these bonds? And if the rates suddenly decrease by 2%? What does this problem teach you about the interest rate risk of low - coupon bonds?
Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2-year T-bond is 6.40%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.40% for a 2-year bond. What is the yield on a 1-year T-bond expected to be one year from now?
Assume that the bond from problem #1 reaches maturity in 5 years instead of 15 years, with the same coupon rate and par value. What would the relevant market prices be at 10%, 5%, and 14% required market rates of return?
In calculating the current price of a bond paying semiannual coupons, one needs to O use double the number of years for the number of payments made. O use the semiannual coupon. O use the semiannual rate as the discount rate. O All of the above needs to be done.
A bond that matures in13years has a$1,000par value. The annual coupon interest rate is8percent and the market's required yield to maturity on a comparable-risk bond is12percent. What would be the value of this bond if it paid interest annually? What would be the value of this bond if it paid interest semiannually?
Consider a bond with a duration of 8.8 years priced at $1,100. If market interest rates were to increase by 0.25%, what would be the predicted new bond price according to duration?
Assume that all interest rates in the economy decline from 8 percent to 7 percent. Which of the following bonds will have the smallest percentage increase in price? A A 10-year zero coupon bond. B An 8-year bond with a 9 percent coupon. E A 3-year bond with a 10 percent coupon. D A 10-year bond with a 10 per coupon. A 1-year bond with a 15 percent coupon.

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