1. A 12 -year bond is issued with a face value of $1,000, paying interest of $80
ID: 2667597 • Letter: 1
Question
1. A 12 -year bond is issued with a face value of $1,000, paying interest of $80 a year. If market yields increase shortly after the T-bond is issued, what happened to the bond’s (explain in detail)a. Coupon rate?
b. Price?
c. Yield to maturity?
2. The following statements are true or not. Explain why?
a. If a bond’s coupon rate is lower than its yield to maturity, the bond will sell for more than face value.
b. If a bond’s coupon rate is higher than its yield to maturity, then the bond’s price will increase over its remaining maturity.
Explanation / Answer
1) a. Coupon rate does not change. it remains at 80/1000 *100 = 8%. b. Price will decline as yield increases because price is discounted cash flows at yield rate. Higher yield means higher discounting and lower PV or price. c. Obviously, YTM will increase. 2) a) False. As yield is higher than coupon rate in this case, the PV or price will be lower than FV. b) False. Price will be more than Fv at the given point of time during maturity since coupon rate is higher than yield. As the maturity period comes closer, the price will be nearing its face value and so, it will be decreasing as maturity approaches.
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