Megan owns a 10-year bond with a par value of $1,000 and a coupon rate of 8%. Th
ID: 2768903 • Letter: M
Question
Megan owns a 10-year bond with a par value of $1,000 and a coupon rate of 8%. The current market price of this bond is $1,194.
a. Like most bonds, this bond pays its interest every six months. How much (in dollars) will Megan earn in interest every six months? Explain or show work.
b. If market interest rates rise, will the market price of Megan’s bond change? If so, in which direction? Explain.
c. If the market price of this bond changes, will Megan’s interest payments change? If so, in which direction? Explain.
d. If market interest rates rise, and Megan holds this bond to maturity, will the amount she receives at maturity change? If so, in which direction? Explain.
e. Calculate the current yield on this bond. Express your answer as a percentage rounded to one decimal place. Show work.
Explanation / Answer
a- amount of interest = face value = 1000 coupon rate = 8%
amount of interest = 1000*8% = 80/2 = 40 per semiannual
b- if market interest rises then bond prices will change and decline because there is inverse relationship between bond price and market interest rate.
c-if market price changes there is no change in interest payment to megan because coupon rate is fixed and decided at the time of bond issue and coupon rate is always applied on face value.
d-if megan hold the bond till maturity there would not be any change in the value at maturity.
e-current yield = interest / market price = 80/1194 =.067*100 = 6.7% annually