# value of bond

## value of bond

a. How is the value of a bond determined? What is the value of a 10-
Year, \$1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent?

b. What would be the value of the bond described in part a if, just
after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond?

c. What would be the value of the bond described in part a if, just
After it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond?

d. What is the yield to maturity on a 10-year, 9 percent annual coupon,
\$1,000 par value bond that sells for \$887.00? That sells for \$1,134.20? What does the fact that a bond sells at a discount or at a premium tell you about the relationship between kd and the bond’s coupon rate?

e. What is interest rate (or price) risk? Which bond has more interest
rate risk, an annual payment 1-year bond or a 10-year bond? Why?

f. What is reinvestment rate risk? Which has more reinvestment rate
risk, a 1-year bond or a 10-year bond?

g.What is reinvestment rate risk? Which has more reinvestment rate
risk, a 1-year bond or a 10-year bond?

h. Suppose you could buy, for \$1,000, either a 10 percent, 10-year,
Annual payment bond or a 10 percent, 10-year, semiannual payment bond.
They are equally risky. Which would you prefer? If \$1,000 is the
Proper price for the semiannual bond, what is the equilibrium price
For the annual payment bond?
i.Now assume the date is 10/25/2001. Assume further that our 12%,
10-year bond was issued on 7/1/2001, will mature on 7/1/2011,
pays interest semiannually (January 1 and July 1), and sells for \$1,100.