Bond A is a premium bond making semiannual payments. The bond pays a coupon rate of 8.6 percent, has a YTM of 6.8 percent, and has 15 years to maturity. Bond B is a discount bond making semiannual payments. This bond pays a coupon rate of 6.8 percent, has a YTM of 8.6 percent, and also has 15 years to maturity. The bonds have a par value of $1,000. What is the price of each bond today? Calculate the price of both bonds if interest rates fall by 2%, 1%, and increase by 1%, 2% (so that you have 5 different prices for each bond). Which bond is more sensitive to changes in interest rates? Comment on why (a good answer will have at least 3 sentences explaining the reason)
Bond A is a premium bond making semiannual payments. The bond pays a coupon rate of 8.6 percent, has a YTM of 6.8 percent, and has 15 years to maturity. Bond B is a discount bond making semiannual payments. This bond pays a coupon rate of 6.8 percent, has a YTM of 8.6 percent, and also has 15 years to maturity. The bonds have a par value of $1,000. What is the price of each bond today? Calculate the price of both bonds if interest rates fall by 2%, 1%, and increase by 1%, 2% (so that you have 5 different prices for each bond). Which bond is more sensitive to changes in interest rates? Comment on why (a good answer will have at least 3 sentences explaining the reason)
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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Transcribed Image Text:Bond A is a premium bond making
semiannual payments. The bond pays a
coupon rate of 8.6 percent, has a YTM of
6.8 percent, and has 15 years to maturity.
Bond B is a discount bond making
semiannual payments. This bond pays
a coupon rate of 6.8 percent, has a YTM
of 8.6 percent, and also has 15 years to
maturity. The bonds have a par value of
$1,000. What is the price of each bond
today? Calculate the price of both bonds if
interest rates fall by 2%, 1%, and increase
by 1%, 2% (so that you have 5 different
prices for each bond). Which bond is
more sensitive to changes in interest
rates? Comment on why (a good answer
will have at least 3 sentences explaining
the reason).
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