Chapter 3: Q23I (page 330)
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.
Below par value
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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?
An investor believes that a bond may temporarily increase in credit risk. Which of the following would be the most liquid method of exploiting this?
a. The purchase of a credit default swap.
b. The sale of a credit default swap.
c. The short sale of the bond
Suppose that today’s date is April 15. A bond with a 10% coupon paid semi-annually every January 15 and July 15 is listed in The Wall Street Journal as selling at an ask price of 101:04. If you buy the bond from a dealer today, what price will you pay for it?
Treasury bonds paying an 8% coupon rate with semi-annual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually?
A bond with a coupon rate of 7% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on January 30 at 100:02. What is the invoice price of the bond? The coupon period has 182 days.
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