Mega Bonds Limited is a major player in the bond market. They are considering the purchase of
Question:
Mega Bonds Limited is a major player in the bond market. They are considering the purchase of a 30-year bond series that was issued July 1, 2011. The bonds have a par value of $1,000 and pay coupons semi-annually at a rate of 6%.
i.) What would be the value of the bonds on December 31, 2022, if the interest rates had risen to 14%? Based on the price, how would these bonds be classified?
ii.) Assuming that the bonds were purchased on December 31, 2022, at the price calculated in part (i), calculate the current yield of these bonds.
iii.) If the bonds had a value of $977 on June 30, 2033, what would be their yield to maturity on that date?
iv.) Mary Jane purchased the bond series on January 1, 2041.
a. Define Reinvestment Rate Risk?
b. Define Interest Rate Risk?
c. For each of the above risks, state whether the level will be high or low for this investment? Explain your answer.
