Interpreting Bond Melds [LO2] Suppose you buy a 7 percent coupon. 20-year bond t

Question

Interpreting Bond Melds [LO2] Suppose you buy a 7 percent coupon. 20-year bond today when it s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why? Bond Prices [LO2] Sqeekers Co. issued 15-year bonds a year ago at a coupon rate of 4.1 percent. The bonds make semiannual payments and have a par value of $1.000. If the YTM on these bonds is 4.5 percent, what is the current bond price? Bond Yields [LO2] A Japanese company has a bond outstanding that sells tor 91.53 percent of its ¥100,000 par value. The bond has a coupon rate ol 3.4 percent paid annually and matures in 16 years. What is the yield to maturity of this bond? Bond Yields [LO2] Union Local School District has a bond outstanding with a coupon rate of 3.7 percent paid semiannulally and 16 years to marurity. The yield to maturity on this bond is 3.9 percent, and the bond has a par value of $5,000. What is the price of the bond? Calculating Real Rates of Return [LO4] If Treasury bills are correctly paying

Explanation / Answer

Value of bond and interest rates share inverse relationship. That is if interest rates increases value of bond decreases and vice versa. Here in this problem, interest rate is increasing to 15%. As a result of this increase in interest rates, value of bond decreases.

The value of bond is calculated by discounting all future coupons and maturity when. When interest rates increases those coupons and maturity values are discounted at a higher prices, and tht’s why we get a lower value for the bond.

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