Assume that in March of 2019 you buy a bond issued by a corporation that has...

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Finance

Assume that in March of 2019 you buy a bond issued by acorporation that has a face of $10,000 and a coupon rate of 5%. Thebond will mature in March of 2022. Assume that you pay $10,500 forthe bond.
2.a (3 points) Given that you paid $10,500 for the bond, whatdoes this tell you about the market interest rate (the yield tomaturity) on the coupon bond when you bought it?
2.b (4 points) Assume that you plan on selling the bond in Marchof 2020. Use a bond- pricing equation to illustrate the price thatyou will be able to sell the bond for in March of 2020. You do nothave to solve the equation.
2.c (4 points) Assume that the corporation defaults in March of2020 and pays you $9000 rather than the promised future cash flows.Briefly discuss the concept of the actual return earned on a debtinstrument and how the corporation’s default has affected youractual return on the bond that you bought in 2019.

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4.5 Ratings (963 Votes)

2 a Using financial calculator Input FV 10000 N 3 PV 10500 PMT 510000 500 Solve for IY as 322 Hence the market rate is 322 Since the bond is selling at a premium it implies that the See Answer

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Assume that in March of 2019 you buy a bond issued by acorporation that has a face of $10,000 and a coupon rate of 5%. Thebond will mature in March of 2022. Assume that you pay $10,500 forthe bond.2.a (3 points) Given that you paid $10,500 for the bond, whatdoes this tell you about the market interest rate (the yield tomaturity) on the coupon bond when you bought it?2.b (4 points) Assume that you plan on selling the bond in Marchof 2020. Use a bond- pricing equation to illustrate the price thatyou will be able to sell the bond for in March of 2020. You do nothave to solve the equation.2.c (4 points) Assume that the corporation defaults in March of2020 and pays you $9000 rather than the promised future cash flows.Briefly discuss the concept of the actual return earned on a debtinstrument and how the corporation’s default has affected youractual return on the bond that you bought in 2019.