Suppose a US company issued 10-year bonds 5 years ago with a face value of $1,000 and an annual coupon rate of 6%. The coupons are paid semi-annually and the bonds are currently trading in the market at a price of $1,089.83. The company is considering whether to call the bonds and issue new 5- year bonds at a par value of $1,000. Based on this information, answer the following four questions. o What is the yield to maturity on the currently outstanding bonds with a remaining time to maturity of 5 vears? If we assume that the company's credit rating has not changed, what is the annual coupon rate the company would pay on the newly issued bond? Would you advise the company to call the bond and refinance? in Suppose the yield that the US government would pay on a 5-year bond with a coupon rate of 6% equals 1.5%. What would be the current market price of the government bond? ii) Looking at current interest rates in the market, 10-year government bonds have a higher yield to maturity than 5-year government bonds. The yield curve on corporate bonds shows that 5-year corporate ponds trade at a higher yield than 5-year government bonds. Can you explain both of these observations? iM Suppose that after a contentious meeting at the Fed, the chairperson decides that it is time for a drastic nterest rate increase. As a result the yield on 5-year government bonds goes up to 3.5%. What is the effect of this interest rate increase on the price of this bond? Would zero-coupon bonds respond more or less aggressively to the change in the interest rate? Explain your answer
Suppose a US company issued 10-year bonds 5 years ago with a face value of $1,000 and an annual coupon rate of 6%. The coupons are paid semi-annually and the bonds are currently trading in the market at a price of $1,089.83. The company is considering whether to call the bonds and issue new 5- year bonds at a par value of $1,000. Based on this information, answer the following four questions. o What is the yield to maturity on the currently outstanding bonds with a remaining time to maturity of 5 vears? If we assume that the company's credit rating has not changed, what is the annual coupon rate the company would pay on the newly issued bond? Would you advise the company to call the bond and refinance? in Suppose the yield that the US government would pay on a 5-year bond with a coupon rate of 6% equals 1.5%. What would be the current market price of the government bond? ii) Looking at current interest rates in the market, 10-year government bonds have a higher yield to maturity than 5-year government bonds. The yield curve on corporate bonds shows that 5-year corporate ponds trade at a higher yield than 5-year government bonds. Can you explain both of these observations? iM Suppose that after a contentious meeting at the Fed, the chairperson decides that it is time for a drastic nterest rate increase. As a result the yield on 5-year government bonds goes up to 3.5%. What is the effect of this interest rate increase on the price of this bond? Would zero-coupon bonds respond more or less aggressively to the change in the interest rate? Explain your answer
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose a US company issued 10-year bonds 5 years ago with a face value of $1,000 and an annual
coupon rate of 6%. The coupons are paid semi-annually and the bonds are currently trading in the market
at a price of $1,089.83. The company is considering whether to call the bonds and issue new 5- year bonds
at a par value of $1,000. Based on this information, answer the following four questions.
() What is the yield to maturity on the currently outstanding bonds with a remaining time to maturity of 5
years? If we assume that the company's credit rating has not changed, what is the annual coupon rate the
company would pay on the newly issued bond? Would you advise the company to call the bond and
refinance?
(in Suppose the yield that the US government would pay on a 5-year bond with a coupon rate of 6% equals
1.5%. What would be the current market price of the government bond?
(iin Looking at current interest rates in the market, 10-year government bonds have a higher yield to
maturity than 5-year government bonds. The yield curve on corporate bonds shows that 5-year corporate
bonds trade at a higher yield than 5-year government bonds. Can you explain both of these observations?
(M Suppose that after a contentious meeting at the Fed, the chairperson decides that it is time for a drastic
interest rate increase. As a result the yield on 5-year government bonds goes up to 3.5%. What is the effect
of this interest rate increase on the price of this bond? Would zero-coupon bonds respond more or less
aggressively to the change in the interest rate? Explain your answer
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