A bond has a face (nominal) value $1,000 with an annual coupon rate of 10%. The...
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A bond has a face (nominal) value $1,000 with an annual coupon rate of 10%. The bond will mature in 20 years, and the market's required return on similar bonds is 12%. Required: (i) Compute the price of the bond. Is it a premium or discount bond? (3 marks) (ii) Which bond is subject to greater interest rate risk: long-term bond or short-term bond? Why? (2 marks) (iii) Which bond is subject to greater interest rate risk: bond with lower coupon rate or bond with higher coupon rate? Why? (2 marks) (iv) If the interest rate is expected to increase, which bond you recommend for each of (c) and (d) above? (1 mark) A bond has a face (nominal) value $1,000 with an annual coupon rate of 10%. The bond will mature in 20 years, and the market's required return on similar bonds is 12%. Required: (i) Compute the price of the bond. Is it a premium or discount bond? (3 marks) (ii) Which bond is subject to greater interest rate risk: long-term bond or short-term bond? Why? (2 marks) (iii) Which bond is subject to greater interest rate risk: bond with lower coupon rate or bond with higher coupon rate? Why? (2 marks) (iv) If the interest rate is expected to increase, which bond you recommend for each of (c) and (d) above? (1 mark)
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