Your sister recently purchased a 5-year coupon-paying bond (Bond A) and a 5-year
ID: 2786452 • Letter: Y
Question
Your sister recently purchased a 5-year coupon-paying bond (Bond A) and a 5-year pure discount bond (Bond B), both with YTMs of 9%. One week after she purchased the bonds, interest rates increased and are now expected to remain constant for the remainder of the life of the bonds. Interest payments can be reinvested at the new higher YTMs. Based on this situation, which of the following statement(s) is/are correct?
I. The prices of both bonds are lower than what she originally paid for them.
II. Her realized return on Bond A will be slightly higher than 9% if she holds the bond to maturity.
III. Her realized return on Bond B will be slightly higher than 9% if she holds the bond to maturity.
IV. The prices of both bonds are higher than what she originally paid for them.
Explanation / Answer
Answer:
I. The prices of both bonds are lower than what she originally paid for them.
Initially the discount rate is lower as compare to discount rate after one week of purchase, Which means higher purchase price initially as compare to the price after one week of purchase. So the prices of both bonds are lower after one week of purchase.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.