XYZ Co has two types of bonds: Bond A and Bond B. There are 1500 units of Bond A; each unit has $100 face value, 6% coupon rate with semi-annual payments, and 15 years to maturity. There are 2500 units of Bond B; each unit has $100 face value, 8% coupon rate with semi-annual payments, and 20 years to maturity. The risk-free rate is 3%, default risk premium for Bond A and Bond B is 2%, maturity risk premium for 15-year maturity is 1.5 % and for 20-year maturity is 2.5%. 

a. Determine the required rate of return for Bond A and for Bond B. 

b. Determine the per unit value of Bond A and of Bond B. Are they premium bonds or discount bonds? Explain and discuss. 

C. Determine the duration of Bond A and pf Bond B. Discuss the factors that affect the duration and how they affect the duration. 

d. If the risk-free rate goes up from 3% to 4% due to inflation, what will be the rate of change in the value of Bond A and of Bond B? Which bond has a greater risk? Explain.

Answer rating: 100% (QA)

a Required rate of return for a bond Riskfree rate Sum of all risk premiums Riskfree rate 3 Required rate of ... View the full answer