Assume an investor is trying to choose between purchasing a deep discount bond or a par value
Question:
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.) Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...
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a PV of 30 semiannually for n 40 and i 4 Table 121 or Appendix D 30 19793 59379 PV of 1000 for n 40 ...View the full answer
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Related Book For 
Fundamentals of Investment Management
ISBN: 978-0078034626
10th edition
Authors: Geoffrey Hirt, Stanley Block
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