How will this interest rate increase impact the prices

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Reference no: EM133497200

Case: Consider a bond that is issued by the JP Morgan Chase that has a face value of $1000, 10 years until maturity, pays coupons semi-annually, and has a coupon rate of 5%. Suppose the yield to maturity is 4%.

Question 1: How much would an investor pay for this bond?

Question 2: Suppose that Best Buy decides to issue 2 bonds, Bond A and Bond B, both with a face value of $1000.

Bond A: has 10 years to maturity, pays coupons semi-annually, and has a coupon rate 5%.

Bond B: has 15 years to maturity, pays coupons semi-annually, and has a coupon rate of 4%.

Assume each of these bonds is compared to a JP Morgan Chase bonds having the same maturity as the bond it is being compared to. Would we expect the yield to maturity to be higher or lower for the Best Buy bonds than JP Morgan Chase bonds? Why? Identify your answers for each bond separately. Do not do any calculations.

Question 3: Suppose the US Federal Reserve announces an increase in interest rates. How will this interest rate increase impact the prices of all 3 bonds? On which bond will the announcement have the greatest impact? Explain. (Do not do any calculations)

Question 4: Suppose Best Buy wants to lower its cost of financing but still wants to borrow money for 15 years. What could Best Buy do to lower its borrowing costs and are there any advantages or disadvantages to your recommendation?

Reference no: EM133497200

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