Solution-What are the prices of alpha and beta bonds

What are the prices of alpha and beta bonds

Reference no: EM132467186

Assuming that you are buying two different coupon bonds: Alpha and Beta with following conditions:

Alpha: - face value (par value) = $1000 - coupon rate= 10% - years to maturity= 5 - yield's to maturity (interest rate) = 10% - the current price of Alpha bond, Pa=?
Beta: - face value (par value)= $1000 - coupon rate=10% - years to maturity= 3 - yield's to maturity (iterest rate)= 10% - the current price of Beta bond, Pb=?

What are the prices of Alpha and Beta bonds?

Now assume that at the beginning of the second year the interest rate in the financial market increases to 20%. What will be the new price of each bond? (Note: Now, the years to maturity for Alpha is 4 years, and for the Beta is 2 years.)

What are your conclusions from part b

Calculate the rate of return for each bond between the first year (t) and the second year (t +1).

What is the rate of capital gain/loss of each bond?

If the interest rate declines, which would you rather be holding, the long-term bond (Alpha) or short-term bond (Beta)? Why? Which type of bond has the greater interest-rate risk?

Reference no: EM132467186

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What are the prices of alpha and beta bonds

Reference no: EM132467186

Reference no: EM132467186

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