33. What is the annual coupon payment for a bond (par value of $1,000) with 7 ye

Question

33. What is the annual coupon payment for a bond (par value of $1,000) with 7 years until maturity, a price of $1,000, and a discount rate of 6%?$80 $70 $60 $50 None of the above

34. What happens to the price of a three-year bond with an 8% coupon when interest rates change from 6% to 8%? A price increase of $53.47 A price decrease of $51.54 A price decrease of $53.47 No change in price None of the above

35. What is the rate of return for an investor who pays $1,000 for a three-year bond with a 7% coupon rate and sells the bond one year later for $1,000? 5% 6% 7% 8% none of the above

Explanation / Answer

33 Present Value = Future value/ ((1+r)^t) where r is the interest rate and t is the time period Price = 1000 Discount rate = 6% Time to maturity 7 years Year 1 2 3 4 5 6 7 Cash Flow 60 60 60 60 60 60 1060 Present value 56.60 53.40 50.38 47.53 44.84 42.30 704.96 Price of bond/ Sum of present values 1000.00 Using excel we can see that the coupon payment is $60. 34 8% coupon 3 year bond par value = 1000 We calculate the price when the interest rate is 6% Present Value = Future value/ ((1+r)^t) where r is the interest rate and t is the time period Year 1 2 3 Future payment 80 80 1080 Present value 75.47 71.20 906.79 Price of bond/sum of present values 1053.46 We calculate the price when the interest rate is 8% Year 1 2 3 Future payment 80 80 1080 Present value 74.07 68.59 857.34 Price of bond/sum of present values 1000.00 A price decrease of $53.47 35 Price of the bond = 1000 time to maturity 3 years coupon rate = 7% However the bondholder sells the bond for $1000 one year later and in that one year the bondholder gets $70 as a coupon payment. Return for bondholder = ((70/1000)*100) Return for bondholder = 7%

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