Reference no: EM131515190
a. Define each of the following, bond, treasury, note, risk free rate of return, par value, coupon rate, coupon payment, period coupon payment, time till maturity, market value, current yield, yield to maturity (YTM), bond call, yield to call (YTC). Add examples for better clarity.
b. State influence of determinants of bond's coupon rate, namely, real rate of return, inflation premium, default premium, and maturity premium on bond's coupon rate. Provide an example in which bond's coupon rate is determined on the basis of the factors mentioned above.
c. A bond has 4 years till maturity, par value is $1000, payments are made annually, and coupon rate is 8%. Suppose that investors' opportunity cost on similar investments is 7%, what will be the fair market value of the bond? Now suppose that investors' opportunity cost rises to 9%, what will be the fair market value of the bond. If the investors' opportunity cost on similar investments becomes equal to 8%, what will be the fair market value of the bond?
d. How do your findings in the previous parts reflect the constitutive relation between investors' opportunity cost and bond's market value? Provide your explanations and definitions in detail and be precise. Explain your work. Provide references for the content
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