Bond yields and prices over time A bond investor is analyzing the following annual coupon bonds: Issuing Company Annual Coupon Rate Smith Corporation 6% Irwin Incorporated 12% Johnson, LLC 9% Each bond has 10 years until maturity and the same level of risk. Their yield to maturity (YTM) is 9%. Interest rates are assumed to remain constant over the next 10 years. Using the previous information, correctly match each curve on the graph to it’s corresponding issuing company. (Hint: Each curve indicates the path that each bond’s price, or value, is expected to follow.) Curve A Q1. Answer here? Curve B Q2. Answer here? Curve C Q3. Answer here? Q4. Based on the preceding information, which of the following statements are true? Check all that apply. a. The current yield for Irwin Incorporated’s bonds is greater than 9%. b. Irwin Incorporated’s bonds have the highest expected total return. c. The current yield for Irwin Incorporated’s bonds is between 0% and 9%. d. Johnson, LLC’s bonds are selling at par. Johnson, LLC’s bonds have exhibited a substantial trading volume in the past few years. Its bonds would be referred to as a Q5. _____ Q1. Option 1 Smith Corporation or Option 2 Johnson, LLC or Option 3 Irwin Incorporated. Q2. Option 1 Irwin Incorporated or Option 2 Smith Corporation or Option 3 Johnson, LLC Q3. Option 1 Irwin Incorporated or Option 2 Johnson, LLC or Option 3 Smith Corporation. Q4. Options provided in the question. Q5. Options 1 New Issue or Option 2 Seasoned Issue. Please check the graph image for more information and please check the options provided for the questions.
Bond yields and prices over time A bond investor is analyzing the following annual coupon bonds: Issuing Company Annual Coupon Rate Smith Corporation 6% Irwin Incorporated 12% Johnson, LLC 9% Each bond has 10 years until maturity and the same level of risk. Their yield to maturity (YTM) is 9%. Interest rates are assumed to remain constant over the next 10 years. Using the previous information, correctly match each curve on the graph to it’s corresponding issuing company. (Hint: Each curve indicates the path that each bond’s price, or value, is expected to follow.) Curve A Q1. Answer here? Curve B Q2. Answer here? Curve C Q3. Answer here? Q4. Based on the preceding information, which of the following statements are true? Check all that apply. a. The current yield for Irwin Incorporated’s bonds is greater than 9%. b. Irwin Incorporated’s bonds have the highest expected total return. c. The current yield for Irwin Incorporated’s bonds is between 0% and 9%. d. Johnson, LLC’s bonds are selling at par. Johnson, LLC’s bonds have exhibited a substantial trading volume in the past few years. Its bonds would be referred to as a Q5. _____ Q1. Option 1 Smith Corporation or Option 2 Johnson, LLC or Option 3 Irwin Incorporated. Q2. Option 1 Irwin Incorporated or Option 2 Smith Corporation or Option 3 Johnson, LLC Q3. Option 1 Irwin Incorporated or Option 2 Johnson, LLC or Option 3 Smith Corporation. Q4. Options provided in the question. Q5. Options 1 New Issue or Option 2 Seasoned Issue. Please check the graph image for more information and please check the options provided for the questions.
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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Question
Bond yields and prices over time
A bond investor is analyzing the following annual coupon bonds:
|
Issuing Company
|
Annual Coupon Rate
|
|---|---|
| Smith Corporation | 6% |
| Irwin Incorporated | 12% |
| Johnson, LLC | 9% |
Each bond has 10 years until maturity and the same level of risk. Their yield to maturity (YTM) is 9%. Interest rates are assumed to remain constant over the next 10 years.
Using the previous information, correctly match each curve on the graph to it’s corresponding issuing company. (Hint: Each curve indicates the path that each bond’s price , or value, is expected to follow.)
| Curve A | Q1. Answer here? |
| Curve B | Q2. Answer here? |
| Curve C | Q3. Answer here? |
Q4. Based on the preceding information, which of the following statements are true? Check all that apply.
a. The current yield for Irwin Incorporated’s bonds is greater than 9%.
b. Irwin Incorporated’s bonds have the highest expected total return.
c. The current yield for Irwin Incorporated’s bonds is between 0% and 9%.
d. Johnson, LLC’s bonds are selling at par.
Johnson, LLC’s bonds have exhibited a substantial trading volume in the past few years. Its bonds would be referred to as a Q5. _____
Q1. Option 1 Smith Corporation or Option 2 Johnson, LLC or Option 3 Irwin Incorporated.
Q2. Option 1 Irwin Incorporated or Option 2 Smith Corporation or Option 3 Johnson, LLC
Q3. Option 1 Irwin Incorporated or Option 2 Johnson, LLC or Option 3 Smith Corporation.
Q4. Options provided in the question.
Q5. Options 1 New Issue or Option 2 Seasoned Issue.
Please check the graph image for more information and please check the options provided for the questions.
Transcribed Image Text:**Bond Value vs. Years to Maturity**
This educational graph illustrates how bond values change as they approach maturity. The x-axis represents "Years to Maturity," ranging from 10 years to 0 years (at maturity), while the y-axis shows the "Bond Value ($)," ranging from $600 to $1,200.
- **Line A** (orange): This line starts at a higher bond value around $1,150 ten years before maturity and gradually declines to meet the bond's face value at maturity ($1,000). It represents a premium bond, which is initially priced higher than its face value.
- **Line B** (green): This horizontal line indicates a bond priced at its face value ($1,000) consistently over time. It represents a par bond, which is sold at its face value from issuance to maturity.
- **Line C** (blue): This line starts at a lower bond value around $750 ten years before maturity and rises progressively until it equals the bond's face value at maturity ($1,000). It represents a discount bond, initially priced below its face value.
Each line graphically demonstrates how premium, par, and discount bonds converge to their face value as they reach maturity. This fundamental concept in bond investing highlights the relationship between bond price and time to maturity.
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