1. Consider a bond selling at par ($100,000) with an annual coupon rate of 3.7% and 20 years to… 1 answer below »

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1. Consider a bond selling at par ($100,000) with an annual coupon rate of 3.7% and 20 years to maturity.

a. What is the price of this bond if the yield to maturity is 15%?b. What is the price of this bond if the yield decreases from 15% to 14%, and by what percentage did the price of this bond change?

2. There are three bonds selling at par ($100,000) with an annual coupon rate of 4%, and 10, 20, and 30 years to maturity. The term structure of interest rates and yields are flat.

a. Which of the three bonds will have the larger price impact if the yield increases from 4% to 6%, one second after they are issued? Why?

b. An investor buys the tree bonds at par before the yield increases. How many years would it take to the investor to recover its initial investment? Assume the investor can reinvest the coupon payments at the yield.

 
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