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Annual coupon interest paying corporate bond

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Reference no: EM132284787

A 5.8% annual coupon interest paying corporate bond with a FV of $1,000 and 15 years to maturity. The bond is currently trading at par.

Statement # 1: The market currently requires a 5.8% return on the bond. If required returns were to increase by 50 bps (or 0.5%, the bond price would drop by $47.62

Statement # 2: In this case, a 50 bps fall in the required rate of return would cause the bond price to increase to $1,047.62

Which of the following is correct. ( show your calculation)

A) Statement #2 is correct with regards to the direction of the price change but incorrect with regard to the new price level of the bond

B) Both statements are correct

C) Statement # 1 is correct with regards to the change in the bond price given a 50bps increase in the rate of return but incorrect with regards to the returns currently required by investors

D) None of the above statements are correct

Reference no: EM132284787

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