A $1,000 Ford bond carries a coupon rate of 2%, payable semi-annually and has 16 years until maturity. It has a yield to maturity (YTM /yield rate) of 4%.

1. What price does the bond sell for?
2. What will the price be if the bond yield rises to 5%?
3. What will the price be if the bond yield drops to 3%?
4. If Ford ran into financial difficulties due to COVID 19, what would happen to the price of the bond. Explain.
5. If Ford defaulted on an interest payment, what would likely happen to the yield rate? Explain.
6. The yield on Ford bonds increased by 0.5% the day before they were to be sold to the market. Would the CFO of Ford be happy or sad? Explain.

Answer rating: 100% (QA)

To calculate the price of the bond we can use the present value formula for a bonds cash flows Price of bond Coupon payment 1 Yield rate 22 Number of ... View the full answer