Task 16

The following information is available around a zero coupon and coupon bond, respectively, where the redemption price (face value) is SEK 1,000, the coupon amounts to a 5% coupon interest rate and the term is 5 years.

a) Describe what is meant by a zero coupon and coupon bond, respectively.

b) Calculate the market price in equilibrium for each bond at a market interest rate of 10%.

c) Assume that the market interest rate falls to 6%. Calculate the market price in equilibrium and compare the relative price change for each bond. Comment on the bonds' relative price change linked to the interest rate change.