Review the instructions in problem 8. Now assume as alternative A you are considering a $10,000 par value Treasury strip that matures in 20 years. The discount rate is 6 percent. You also are considering alternative B, which represents a $10,000 par value Treasury strip that matures in 16 years. The discount rate is 8 percent. Which has the lower price (present value)?
Answer to relevant QuestionsWhat strategy or advice can you offer to Gail Rosenberg? List the six principles associated with bond-pricing relationships. What is the bond reinvestment assumption? Is this necessarily correct? Use Table 12–4 on page 327 to describe the worst possible scenario for a $1,000 bond based on yield change, years to maturity, and coupon rate. What would be the price of the bond? 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.
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