Question 2

The following is data on $1,000 par value bonds issued by Sagicor Bank, Appliance Traders Ltd, and Rapid True Value at the end of 2018. Assume you are thinking about buying these bonds as of January 2019. Answer the following questions:

A. Assuming interest is paid annually, calculate the values of the bonds if you are required rates of return are as follows: Sagicor Bank, 6 percent; Appliance Traders Ltd, 8 percent; and Rapid True Value, 10 percent; where:

Sagicor Bank Appliance Traders Ltd Rapid True Value Coupon interest rate 5.25% 4.25% 4.75%

Years to maturity 30 10 5

B. At the end of 2018, the bonds were selling for the following amounts:

Sagicor Bank $1,100

Appliance Traders Ltd $1,030

Rapid True Value $1,015

What were the expected rates of return for each bond? (6 marks)

C. How would the value of the bonds change if:

i. your required rate of return increased 2 percentage points or

ii. decreased 2 percentage points? (9 marks)

D. Explain the implications of your answers in part (B) in terms of interest rate risk,

premium bonds, and discount bonds. (2 Marks) (Total 20 marks)