Chapter 3: Q-10-241 (page 330)
Question: Is the coupon rate of the bond in the previous problem more or less than 9%?
A bond has a current yield of 9% and a yield to maturity of 10%. Is the bond selling above or below par value? Explain.
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Which security has a higher effective annual interest rate?
a. A three-month T-bill with face value of \(100,000 currently selling at \)97,645.
b. A coupon bond selling at par and paying a 10% coupon semi-annually.
Why do bond prices go down when interest rates go up? Don’t investors like high interest rates?
Question: A 30-year maturity, 8% coupon bond paying coupons semi-annually is callable in five years at a call price of \(1,100. The bond currently sells at a yield to maturity of 7% (3.5% per half-year):
a. What is the yield to call?
b. What is the yield to call if the call price is only \)1,050?
c. What is the yield to call if the call price is $1,100 but the bond can be called in two years instead of five years?
Short-term interest rates are more volatile than long-term rates. Despite this, the rates of return of long-term bonds are more volatile than returns on short-term securities.
How can these two empirical observations be reconciled?
Consider a bond paying a coupon rate of 10% per year semi-annually when the market interest rate is only 4% per half-year. The bond has three years until maturity.
a. Find the bond’s price today and six months from now after the next coupon is paid.
b. What is the total rate of return on the bond?
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