10) Two 10-year bonds with semi-annual coupons are identical in every respect except that onepays a higher coupon rate than the other. Both bonds yield 6.0% (bond equivalent). The lowercoupon rate is 5.0% (bond equivalent). The price (at issue) of the bond with the higher couponrate is 1.25-times the price of the bond with the lower coupon rate. Find the higher coupon rate,expressed as a nominal annual rate compounded semiannually.a) 6.25%b) 7.3%c) 8.1%d) 9.4%e) 10.5%

Price of the bond is the PV of annual coupons and par value discounted at the YTM. First, we need…

Answered: rate is 1.25-times the price of the…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter20: Hybrid Financing: Preferred Stock, Warrants, And Convertibles

Section: Chapter Questions

Problem 7Q

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Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
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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rate is 1.25-times the price of the bond with the lower coupon rate. Find the higher coupon rate, expressed as a nominal annual rate compounded semiannually.