1. True or False? The current interest rate on a 10-year coupon bond (with face value = $1,000 and annual coupon rate = 3.25%) is 2.42%. This implies the buyer of the bond will have a return o 3.25% if she sells the bond next year. 2. Last year you purchased a bond with an interest rate of 5 percent. Now the interest rate on the bond market drops to 4%. Then which of the following are correct? There are more than one answer)Question 20 options: The interest rate you are earning from this bond is lower. The face value of your bond is lower. You will receive the same amount of coupon payments from the issuer while you are holding the bond. Your return on this bond will be higher later when you hold it to the maturity date. You can sell your bond at today's market for a lower price. You can sell your bond at today's market for a higher price. 3. Adam buys a two-year bond with $1,000 face-value and 10% coupon rate for $1,000 today (Year 1). If one year later (Year 2) the market interest rate increases by 5% and Adam sells the bond, then his rate of return on this investment is ____ % (round UP to the first decimal point x.x, negative if it is a loss).

Answered: True or False? The current interest…

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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1. True or False? The current interest rate on a 10-year coupon bond (with face value = $1,000 and annual coupon rate = 3.25%) is 2.42%. This implies the buyer of the bond will have a return o 3.25% if she sells the bond next year.

2. Last year you purchased a bond with an interest rate of 5 percent. Now the interest rate on the bond market drops to 4%. Then which of the following are correct? There are more than one answer)

Question 20 options:

	The interest rate you are earning from this bond is lower.
	The face value of your bond is lower.
	You will receive the same amount of coupon payments from the issuer while you are holding the bond.
	Your return on this bond will be higher later when you hold it to the maturity date.
	You can sell your bond at today's market for a lower price.
	You can sell your bond at today's market for a higher price.

3. Adam buys a two-year bond with $1,000 face-value and 10% coupon rate for $1,000 today (Year 1). If one year later (Year 2) the market interest rate increases by 5% and Adam sells the bond, then his rate of return on this investment is ____ % (round UP to the first decimal point x.x, negative if it is a loss).

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When a bond is issued it pays a fixed rate of interest. This is known as a coupon rate. The price of a bond is linked to both its interest rate as well as the prevailing market rates.

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