Chad is considering investing in a 17-year bond paying semi-annual coupons at 5%. The face value is $1,000.

a) Chad tries to calculate the price himself. He gets an answer less than $1,000. Explain, without doing any calculations, why the price Chad calculated must be incorrect. 

b) Calculate the greatest price he is willing to pay if he requires a yield of 4.5%

c) If Chad pays a higher price than the answer calculated in part b), would he be receiving a higher or lower yield on his investment? Justify your answer.

d) One year after purchase, immediately after receiving the coupon on that day, Chad sells the bond to Ren for a price of $1,100. Write down an equation that can be solved to find Ren’s yield to maturity, expressed as a nominal annual rate compounding semi-annually.

e) Describe 3 important differences between shares and bonds.

f) Name 2 expenses that a bond investor would encounter in practice that we typically ignore in our bond price and yield calculations

Answer rating: 100% (QA)

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