Question

Please double check answer and correct any that are wrong.

1. Exploring Finance: Coupon Bonds Coupon Bonds Conceptual Overview: Explore the value of fixed-interest coupon bonds of different terms. This graph shows the value of 10% coupon bonds of different terms across differing market interest rates. Each bond pays INT = $100 at the end of each year and returns M = $1,000 at maturity. For comparison, the blue line depicts the value of a one-year bond. The term of the other bond in years may be changed using the slider. Drag on the graph to change the current market interest rate (rd) at which the bond (orange curve) is evaluated. 15 FYrs INT 2 t=1 (1+rd) M (1+rd) yrs $100 (1+0.100 $1000 T (1+0.100 15 - od Value Bond 3.000 2,500 2,000 1,500 15-Year Bond 1,000,000+..... 1-Year Bond 500 15 20 25 Market Interest Rate (%) Yrs=15

Answer 1

1). FV = 1,000; PMT (coupon payment) = 10%*1,000 = 100; N = 15; rate (or YTM) = 15%, solve for PV.

PV = 707.63 (Option b)

2). FV = 1,000; PMT (coupon payment) = 10%*1,000 = 100; N = 12; rate (or YTM) = 5%, solve for PV.

PV = 1,443.16 (Option c)

3). Coupon rate is equal to the market rate so the bond is selling at the par value of $1,000. (Option c)

4). If market rate is greater than the coupon rate of 10% then current price will be lower than the par value of $1,000. (Option b)

5). For a longer term bond compared to a 1-year bond, it will be more affected by changes in the market rate. (Option c)