i) If investors have demanded an interest rate of 5 percent on the bond investment, what is the maximum prices to pay for the 1-year bond and 30-year bond? (ii) Suppose that the interest rate has increased to 20%, calculate the values of the 1-year bond and 30-year bond. (iii) Based on the calculations in parts (b) (i) and (ii) above, explain with reasons the fundamental relationship between interest rates and bond maturity.
i) If investors have demanded an interest rate of 5 percent on the bond investment, what is the maximum prices to pay for the 1-year bond and 30-year bond? (ii) Suppose that the interest rate has increased to 20%, calculate the values of the 1-year bond and 30-year bond. (iii) Based on the calculations in parts (b) (i) and (ii) above, explain with reasons the fundamental relationship between interest rates and bond maturity.
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
Related questions
Question
(i) If investors have demanded an interest rate of 5 percent on the bond investment, what is the maximum prices to pay for the 1-year bond and 30-year bond?
(ii) Suppose that the interest rate has increased to 20%, calculate the values of the 1-year
bond and 30-year bond.
(iii) Based on the calculations in parts (b) (i) and (ii) above, explain with reasons the
fundamental relationship between interest rates and bond maturity.
(iv) Briefly explain the meaning of the terms “bond’s coupon rate”, “current yield”, and
“yield to maturity”.
(v) Explain why bonds have protective covenants.
Transcribed Image Text:(b)
Berk Bhd issues bonds that pay interest semi-annually and have maturities of 1 year and 30
years. The bonds have a face value of RM1,000 and an annual coupon rate of 10 percent.
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