A bond investor is analyzing the following annual coupon bonds: Issuing Company

Question

A bond investor is analyzing the following annual coupon bonds: Issuing Company Irwin Enterprises Johnson Incorporated Smith Metalworks Annual Coupon Rate 5% 12% 9% Each band has 10 years until maturity and has the same risk. Their yield to maturity (YTM) is g%. Interest rates are assumed to remain constant over the next 10 years. Label the curves on the following graph to indicate the path that each bond' s price, or value, is expected to follow BOND VALUE ISI 1200 1100 1000 900 800 700 600 YEARS TO MATURITY Based on the preceding information, which of the following statements are true? Check all that apply The current yield for Johnson's bonds is greater than g%. Smith's bonds are selling at par Johnson's bonds have the highest expected total return. The current yield for Johnson's bonds is between 0% and g%. If a bond is selling for a price much lower than its par value, it is most likely that the bond is bond

Explanation / Answer

Yellow Line: Johnson Incorporated

Green Line : Smith Metalworks

Blue Line : Irwin Enterprises

Price of Johnson bond = $1192.53

Current yield = 12% of 1000/1192.53 = 10.06%

Only option 1 and 2 is correct last two options are false.

If bond is selling for price much lower than its par value, it is most likely that the bond is discount bond.

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