In the last semester's final finance exam there was this exercise: (You) got a bit info about...

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Finance

In the last semester's final finance exam there was thisexercise:
(You) got a bit info about a bonds interest yield and the marketinterest rate and
based on that calculate the market value of the bond and the marketinterest
rate of the bond + would you invest in this bond if the price was105,5% of its
face value?
How would I calculate something like this and decide on thefinal Question asked? Could you Maybe come up with an example.Thanks a lot.

Answer & Explanation Solved by verified expert

4.3 Ratings (799 Votes)

Interest Yield of a bond is the annual returnearned on the price paid for the bond Suppose a bond is purchasedfor 1000 and it has a coupon rate of 5 then the interest yieldwill be CouponPrice of Bond 00510001000 500 So interestyield can also be said to be the Coupon Rate of the bondMarket Value of a bond is calculated bycalculating the Present Value of all thefuture cash flows which an investor will receivefrom the bondLet us take an example where we are given thata bond with Face Value 1000 givesannual coupon with a coupon rateof 5 and the market interestrate on a similar bond of See Answer

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Transcribed Image Text

In the last semester's final finance exam there was thisexercise:(You) got a bit info about a bonds interest yield and the marketinterest rate andbased on that calculate the market value of the bond and the marketinterestrate of the bond + would you invest in this bond if the price was105,5% of itsface value?How would I calculate something like this and decide on thefinal Question asked? Could you Maybe come up with an example.Thanks a lot.