2. Four coupon bonds are sold in the market with the following information: Bond

Question

2. Four coupon bonds are sold in the market with the following information:

Bond 1 Face value $1000 Coupon rate 5% Maturity 10 years

Bond 2 Face value $1000 Coupon rate 9% Maturity 10 years

Bond 3 Face value $1000 Coupon rate 7% Maturity 10 years

Bond 4 Face value $1000 Coupon rate 9% Maturity 30 years
(1) Without calculation, order the present values of the bonds from high to low under the constant interest rate of 7%. Hint: Your explanation is crucial because we require no calculation.           
(2) Calculate the present value of the bonds under the constant interest rate of 7%.           
(3) Now that all four bonds are sold at a same price. Is it true that people will surely buy the one with the highest present value calculated in (2)? If your answer is no, explain your reason.  

Explanation / Answer

1) In order of present values for the same face value Bond 2 Interest rate par & also years to maturity less Bond 4 Interest rate par & also years to maturity more Bond 3 Interest rate = coupon rate ;So PV will be= par Bond 1 Interest rate > coupon rate ;So PV will be

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