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7. If a simple discount bond sells above par, what do you know about the interest rate?
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- What causes the yield on a discount bond to exceed the coupon rate on a bond?What is the current price of a $1,000 discount bond that matures in 5 years if the yield to maturity on that bond is 5%? Show your work!What is an interest rate future? How can they be used to reduce interest rate risk by a borrower?
- Consider a bond with a three-year remaining maturity. A. If somehow the face value of the coupon is $10,000 and the annual payment is $500. If the yield to maturity is 6%, what would the price of this bond be? b. Considering your response to question (a), is the coupon rate higher, lower, or the same as the yield to maturity? Why?11. A zero coupon bond is selling for $476. The bond has a face value of $1,000 and matures in 8 years. Your friend asks you if he should buy the bond. He tells you his required return is 9 percent. Would you recommend he buy the bond or not? Explain your answer.could you show how to determine the bond's present value without a calculator?
- 10. The bond has a 30-year maturity, an 8% coupon, and sells at an initial yield to maturity of 8%. Because the coupon rate equals yield to maturity, the bond sells at par value, or $1,000. The modified duration of the bond at its initial yield is 11.26 years, and its convexity is 212.4. If the bond's yield increases from 8% to 10%, the bond price will fall to $811.46, a decline of 18.85%. a. How does the price change according to the duration rule? b. How does the price change according to the duration-with-convexity rule?3. You will need $100,000 in seven years to buy a new car. How much money do you need to deposit in the bank now in order to have $100,000 seven years from now if the interest rate is 7%?3. What is the yield to maturity of a 15% coupon bond selling for $900 that has a face value of $1,000?
