Please Solve In 10mins I will Thumbs-up An investor is considering buying one of two 10-year, $1,000 face value, noncallable bonds: BondA has a 7% annual coupon, while Bond B has a 9% annualcoupon. Both bonds have a yield to maturity of 8% , and the YTM is expected to remain constant for the next 10 years. Which of the following statements isCORRECT?O a Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.O b. One year from now, Bond A's price will be higher than it is today.Oc. Bond A's current yield is greater than 8%.O d. Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.O e. Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

Price of a bond = sum of all present values of future cash flows from it. Cash flow from a bond can…

Answered: avestor is considering buying one of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 4P

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Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). What is the yield to maturity? What is the yield to call if they are called in 5 years? Which yield might investors expect to earn on these bonds, and why? The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?
What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)

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