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What do we know about the price of the bond

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Reference no: EM132804295

(1) Consider a bond with five years to maturity. The bond has a par (or "face") value of $1000 and pays a 6% coupon at the end of each year. Based on this description of the bond, consider the following questions.

(a) If the yield on the bond is more than 6%, what do we know about the price of the bond? Why?

(b) If the yield to maturity on the bond is 8%, calculate the price of the bond.

(c) If the yield to maturity on the bond is 8.1%, calculate the price of the bond.

(d) What is the percentage change in the bond price between (b) and (c)?

(2) Consider a bond with two years to maturity. The bond has a par (or "face") value of $1000 and a 5% coupon rate (coupon paid at the end of each year).

(a) If the bond is sold to its initial holder (Mr. Jones) for $985, what is its "yield to maturity" (hint you may have to use the Excel solver)?

(b) After one year, Mr. Jones sells the bond to Mr. Smith for $999 (assume that Mr. Jones collects the coupon for year one before he sells it). What is that yield that Mr. Jones realized ("yield to date" or "holding period yield")? If Mr. Smith holds the bond to maturity, what return will he receive?

(c) If Mr. Jones had sold the bond to Mr. Smith for $1010, what would have been Mr. Jones's yield to date? Mr. Smith's "yield to maturity"?

Reference no: EM132804295

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