Bond yield problem Chapter #15-Bonds Eric purchased the folowing bond at par val
ID: 2394268 • Letter: B
Question
Bond yield problem
Chapter #15-Bonds Eric purchased the folowing bond at par value (face value) Face Value $1,000 Coupon Rate 5% Maturity 20 years interest paid semi-annual Question 01 What is Eric entitied to receive each year? Question #2 Assume that 5 years later, interest rates in the market increase If Eric sells t, will he get more or less than face value? ess How much is she entitled Assume that Jessica buys the bond from Eric for $940. to receive each year? What is her annual yield? Question #3 Assume that 5 years later, nerest rates in the markat decrease. Eric sels it, will he get more or less than face value? Assume that Jessica buys the bond fram Eric for $1,080. How much is she entitled to receive each year? What is her annual yield?Explanation / Answer
1. The Semi Annual Interest Paid is $. 1000*5/100*6/12 - Rs.25
Eric is entitled to receive $.50 every year.
2. when the interest rates increases, the bond price prices decrease when because the fixed interest and principal payments stated in the bond will become less attractive to investors.
Hence, Eric will get less amount han the face value if he sells after 5 years when the interest rates have increased.
3. If the Interest rates decreases the bond price will increse because the fied Interest and principal payment will become more attractive for the buyer.
Hence Eric ill get more amount thna the face value in a scenario of decreasing interest rates.
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Even if Jessica is purachsing the bond from Eric for $ 1060. Annual Interest received will be on face value of the bond.
She will receive $ 25 Semi annually
The Semi Annual Interest Paid is $. 1000*5/100*6/12 - Rs.25
Total Interest during a year - $50
Her annual yield per year is 5.06%