Consider the following two bonds that pay Interest annually: At a market discoun
ID: 2764676 • Letter: C
Question
Consider the following two bonds that pay Interest annually: At a market discount rate of 4%, the price difference between Bond A and Bond B per 100 of par value is closest to: 3.67 3.70 3.77 4.00 4.03 Consider Bond B in question 11, if interest rates move up by 100 basis points, what is the closest percentage change in the price of the bond: -3.6% -1.8% +1.8% +3.6% No change Suppose that a U.S. Treasury bond maturing April 30,2020 is purchased with a settlement date of April 15,2019. The coupon rate is 1.125%, the required yield is 1.5%, par is 100. What is the dirty (full) price of this bond?Explanation / Answer
11 Coupon Rate Time to Maturity Discount rate Par Value Bond A 5% 2 4% 100 Bond B 3% 2 Cash Flow for Bond A Present Value of Cash Flow Year 1 5 4.81 Year 2 5 4.62 Value of Bond A 9.43 Cash Flow for Bond B Present Value of Cash Flow Year 1 3 2.88 Year 2 3 2.77 Value of Bond B 5.66 Difference in Value of Bond A and B 3.77 12 if interest rate increased by 100 basis points i.e. new coupon rate for bond B is 4% New Coupon Rate Time to Maturity Discount rate Par Value Bond B 4% 2 4% 100 Cash Flow for Bond B Present Value of Cash Flow Year 1 4 3.85 Year 2 4 3.70 New Value of Bond B 7.54 Percentage change in price of Bond B 33% 1.89