Interest rate risk and bond price changes Fidelity Music Inc. has an older high yield bond...
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Interest rate risk and bond price changes Fidelity Music Inc. has an older high yield bond (t.e. junk bond) issue and a more recent investment grade bond issue. Fidelity's high yield 12% coupon bonds have a YTM of 15% and will mature in 8 years. The investment grade bonds have a 9% YTM, mature in 20 years. and pay a 6% annual coupon. As a bond investor you would like to evaluate the bond price sensitivity to underlying interest rate fluctuations for both Fidelity Music bond issues. a. What is the current price of both bonds? b. What will be the percentage change in bond price for both bonds if the underlying interest rates increase by 2 %? Which bond has more price sensitivity to interest rate risk? c. Alternatively, what will be the percentage change in bond price for both bonds if the underlying interest rates decrease by 2 %? Which bond has more price sensitivity to interest rate risk? 4 d. What conclusions do you draw from comparing your answers to parts b and c? e. Would your answers to parts b through e change if both bonds matured in 13 years and paid a 12% annual coupon and, if so, how? GEXED a. The current price of the high yield bond is $ (Round to the nearest cent.) Interest rate risk and bond price changes Fidelity Music Inc. has an older high yield bond (t.e. junk bond) issue and a more recent investment grade bond issue. Fidelity's high yield 12% coupon bonds have a YTM of 15% and will mature in 8 years. The investment grade bonds have a 9% YTM, mature in 20 years. and pay a 6% annual coupon. As a bond investor you would like to evaluate the bond price sensitivity to underlying interest rate fluctuations for both Fidelity Music bond issues. a. What is the current price of both bonds? b. What will be the percentage change in bond price for both bonds if the underlying interest rates increase by 2 %? Which bond has more price sensitivity to interest rate risk? c. Alternatively, what will be the percentage change in bond price for both bonds if the underlying interest rates decrease by 2 %? Which bond has more price sensitivity to interest rate risk? 4 d. What conclusions do you draw from comparing your answers to parts b and c? e. Would your answers to parts b through e change if both bonds matured in 13 years and paid a 12% annual coupon and, if so, how? GEXED a. The current price of the high yield bond is $ (Round to the nearest cent.)
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a Current Price of the High Yield Bond 8569 of Par a Current Price of the Investment Grade Bond 7055 ... View the full answer
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
Posted Date:
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