Question: Consider two bonds, one with 5 years to maturity and the other with 20 years to maturity. Both have $1,000 face values and 8% coupon

Consider two bonds, one with 5 years to and the other with 20 years to Both have $1,000 face values and 8% rates (with annual interest payments), and both sell at par. Assume that the yields of both bonds fall to 6%. Calculate the dollar increases in the bonds' prices. What percentage of this increase in each case comes from a change in the present value of the bonds' principals, and what percentage comes from a change in the present value of the bonds' interest payments?

Step by Step Solution

★★★★★

3.37 Rating (169 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Discounting the fiveyear bonds cash flows at 6 gives the following intrinsic value V 80 PVAF 5 years ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

801-B-A-I (8015).docx

120 KBs Word File

Students Have Also Explored These Related Accounting Questions!

A bond with 5 years to maturity and a coupon rate of 6% has a par, or face, value of $20,000. Interest is paid annually. If you required a return of 8% on this bond, what is the value of this bond to...

Consider two bonds with $1,000 face values that carry coupon rates of 8%, make annual coupon payments, and exhibit similar risk characteristics. The first bond has 5 years to maturity whereas the...

Consider two bonds, Bond C and Bond D, both with a yield to maturity of 10 percent and with 5 years to maturity. These are standard bonds with semiannual coupon payments. Bond C has a coupon rate of...

An investor holds two bonds, one with five years until maturity and the other with 15 years until maturity. The face values and coupon rates for both of them are the same. Which of the following is...

6. Consider two bonds, one with five years to maturity and the other with 20 years to maturity. Both have $1,000 face values and 8% coupon rates (with annual interest payments), and both sell at par....

5 obj questions please How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest...

Consider two bonds Bond A: 10 years to maturity: F -1,000; Coupon rate-5% (annual) Bond B: 20 years to maturity: FV-1,000; Coupon rate-596 (annual) 1, Assuming interest rate is 5%, calculate the...

An investor holds two bonds, one with five years until maturity and the other with 20 years until maturity, and both have the same coupon rate. Which of the following is more likely if interest rates...

Consider two bonds: Bond A: 10 years to maturity; FV = 1,000; Coupon rate = 6% (annual) Bond B: 20 years to maturity; FV = 1,000; Coupon rate = 6% (annual) Assuming interest rate is 6%, calculate the...

Two bonds, both with 10 years to maturity, have the same yield to maturity (equal to 5%) but different coupon rates. Coupon payments are annual. Bond A has a Macaulay duration of 8.66 and bond B has...

After its first year of operation, Rusty Nails, Inc. presented the following financial reports Rusty Nails Inc. Balance Sheet as of December 31, 2005 Assets Cash Accounts Receivable Merchandise...

Suppose the math department chair at a large state university wants to estimate the average overall rating, out of five points, that students taking Introductory Statistics gave their lecturers on...

At which stage of the database life - cycle phase are DBMS software and application programs installed? a . Operation b . Maintenance and evaluation c . Implementation and loading d . Database design

A small drive-it-through-yourself car wash, in which the next car cannot go through the washing procedure until the car in front is completely finished, has a capacity to hold on its grounds a...

A closed-end fund has total assets of $240 million and liabilities of $110,000. Currently, 11 million shares are outstanding. What is the NAV of the fund? If the shares currently sell for $19.25,...

How does a high-water mark constrain hedge fund managers from earning excess performance management fees?

In Problem 11, suppose the annual operating expense ratio for the mutual fund is 0.75 percent and the management fee is 0.45 percent. How much money did the funds management earn during the year? If...

Implied growth. An analyst is investigating the potential growth rates in residual income of companies in the technology sector. He collects the following data on Lesta Corp., a manufacturer of...

An oil-drilling company must choose between two mutually exclusive extraction projects, and each requires an initial outlay at t = 0 of $12.6 million. Under Plan A, all the oil would be extracted in...

Question 14 5 pts You can choose to invest in one of the following 2 bonds: If you firmly expect market rates to decline from 2.5% to 2%, which bond should you best buy? Any of these One cannot say B...