Here is a schedule for bond yields of different ratings: Rating AAA BBB Yield (APR) 2%...

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Here is a schedule for bond yields of different ratings: Rating AAA BBB Yield (APR) 2% 6% 12% Answer the following questions using the information in the table. Show your calculations. Hint: get effective yield, coupons and time periods first. 1) Firm A has recently issued a 5-year bond that is rated as "AAA", with a face value of $1000, annual coupon rate of 5%, paid semi-annually, how much should the price be? (20 points) 2) Firm B has recently issued a 3-year bond that is rated as "C", with a face value of $1000, annual coupon rate of 4%, paid semi-annually, how much should the price be? (20 points) 3) You found out that the market is pricing the firm A bond at $950 and firm B bond at $1250, which of the following should you do to exploit the situation? Give a very brief explanation. (10 points) a) Long firm A bond and short firm B bond. b) Short firm A bond and long firm B bond. c) Do nothing and forget about the opportunity. Here is a schedule for bond yields of different ratings: Rating AAA BBB Yield (APR) 2% 6% 12% Answer the following questions using the information in the table. Show your calculations. Hint: get effective yield, coupons and time periods first. 1) Firm A has recently issued a 5-year bond that is rated as "AAA", with a face value of $1000, annual coupon rate of 5%, paid semi-annually, how much should the price be? (20 points) 2) Firm B has recently issued a 3-year bond that is rated as "C", with a face value of $1000, annual coupon rate of 4%, paid semi-annually, how much should the price be? (20 points) 3) You found out that the market is pricing the firm A bond at $950 and firm B bond at $1250, which of the following should you do to exploit the situation? Give a very brief explanation. (10 points) a) Long firm A bond and short firm B bond. b) Short firm A bond and long firm B bond. c) Do nothing and forget about the opportunity.

Answer rating: 100% (QA)

To answer the questions we first need to calculate the effective yield coupon payments and time periods for each bond Firm A Bond Rating AAA Yield 2 A... View the full answer