# Question: Assume an investor is trying to choose between purchasing a

Assume an investor is trying to choose between purchasing a deep discount bond or a par value bond. The deep discount bond pays 6 percent interest, has 20 years to maturity, and is currently trading at $656.80 with a 10 percent yield to maturity. It is callable at $1,050.

The second bond is selling at its par value of $1,000. It pays 12 percent interest and has 20 years to maturity. Its yield to maturity is also 12 percent. The bond is callable at $1,080.

a. If the yield to maturity on the deep discount bond goes down by 2 percent to 8 percent, what will the new price of the bond be? Do semiannual analysis.

b. If the yield to maturity on the par value bond goes down by 2 percent to 10 percent, what will the new price of the bond be? Do semiannual analysis.

c. Based on the facts in the problem and your answers to parts a and which bond appears to be the better purchase? (Consider the call feature as well as capital appreciation.)

The second bond is selling at its par value of $1,000. It pays 12 percent interest and has 20 years to maturity. Its yield to maturity is also 12 percent. The bond is callable at $1,080.

a. If the yield to maturity on the deep discount bond goes down by 2 percent to 8 percent, what will the new price of the bond be? Do semiannual analysis.

b. If the yield to maturity on the par value bond goes down by 2 percent to 10 percent, what will the new price of the bond be? Do semiannual analysis.

c. Based on the facts in the problem and your answers to parts a and which bond appears to be the better purchase? (Consider the call feature as well as capital appreciation.)

## Answer to relevant Questions

Given a 15-year bond that sold for $1,000 with a 9 percent coupon rate, what would be the price of the bond if interest rates in the marketplace on similar bonds are now 12 percent? Interest is paid semiannually. Assume a ...What is the yield to maturity for a 10 percent coupon rate bond priced at $1,090.90? Assume there are 20 years left to maturity. It is a $1,000 par value bond. Use the trial-and-error approach with annual analysis. How does the volatility of a stock influence the conversion premium? In problem 4, market rates of interest for comparable bonds are 10 percent and the pure bond value is $813.17. What will happen to the pure bond value if market rates of interest go to 12 percent? What factors influence a speculative premium on an option?Post your question