A 10 year bond with annual coupons has face value 500 units and coupon rate of two
Question:
A 10 year bond with annual coupons has face value 500 units and coupon rate of two per cent. Because the bond is seen as a "safe refuge", during uncertain times the price is bid up.
a) Calculate by how much the (second hand market) price would need to rise to in order for the yield received by a purchaser to fall to zero.
b) If the bond had no coupons what yield would be the result of an increase in its second hand market price by 50%?
c) If, instead, the bond had only coupons (a perpetuity), what price would drive the yield to zero? What yield would emerge from an increase in its second hand market price by 50%?
d) Briefly explain the contrasts in yield behaviour between non-coupon bonds, coupon bonds with short maturities, coupon bonds with finite but long
maturities and perpetuities. Explain which type is most likely to have negative yields and why?
e) Briefly explain why, when yields actually go negative, they do so by small amounts.
Introduction to Management Science A Modeling and Cases Studies Approach with Spreadsheets
ISBN: 978-0078024061
5th edition
Authors: Frederick S. Hillier, Mark S. Hillier