1. What is a bond's coupon rate? Does it change over the life of the bond? If a bond's yield to maturity exceeds its coupon rate, what is its price compared to par (or face value)? Why? 2. What is a consol or perpetuity? What is the price of perpetuity if it pays an annual coupon of $70, and its yield to maturity is 7%? What is its price if the yield to maturity rises to 14%? 3. (a) Calculate the initial bond prices on the different maturities identified below for a 2% coupon-rate bond with face value of $1000 when initially interest rates are 4%. Then calculate the prices of the bonds next year if interest rates fall to 3%. Maturity Initial Price Next year price 20 yrs 10 yrs 5 yrs (b) What is the one-year (rate of) return on the 10-yr maturity only? Briefly explain your calculation. (c) How would you assess the overall interest rate risk for 20-year maturities versus the 5-year maturities (only)? Briefly explain. 4. Identify the shift(s) in the supply and/or demand for bonds if the volatility in stock prices increases and at the same time the government removes investment tax credits for businesses with the net effect of raising the tax rate for firms engaged in investment activities. Be sure to explain the reason 'why' the demand and/or supply curve(s) shifts. Draw a fully labeled diagram of the bond market to illustrate your answer.
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The coupon rate of a bond is the fixed annual interest rate that the bond issuer promises to pay to the bondholder. It is expressed as a percentage of the bond's face value. The coupon rate does not change over the life of the bond, meaning that the bondholder Show more…
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