Question

Please answer the question below:

Please complete the following multi-part problem.  

a. Linda bought $10,000 of XYZ, Inc. 6% bonds "at par" that mature in 2030. "At par" means that she paid $10,000 for the bonds. The bonds pay a 6% fixed rate of interest. What is she entitled to receive from XYZ, Inc.?

b. Same facts as above, but now assume that because of poor economic conditions in the country the market rate is 5% in Year 5. What is Linda entitled to receive from XYZ, Inc. in Year 5?

c. Use the same facts as part b above. Assume now that Linda sold her bond investment to Jonathan in Year 5. Could she sell it for $10,000, for more, or for less?

d. What is Jonathan entitled to receive from XYZ, Inc. after buying the bonds from Linda in year 5? Will his actual yield be higher or lower than 6% (consider also yield maturity)?

e. If the business of XYZ, Inc. had prospered, how would have Linda and/or Jonathan benefited from it?

Answer 1

1.
XYZ will pay 10000*6%=600 as interest every year till maturity and an additional amount of 10000 at the time of maturity

2.
XYZ will pay 600 in Year 5

3.
More as bond prices are inversely related to rates

4.
XYZ will pay 10000*6%=600 as interest every year till maturity and an additional amount of 10000 at the time of maturity
Yield to maturity=5%

5.
No benefit