Please show all work!! John and Dave,are discussing the valuation of a 5.8% annual coupon...
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Please show all work!!
John and Dave,are discussing the valuation of a 5.8% annual coupon interest paying corporate bond with a face value of $1,000 and 15 years to maturity. The bond is currently trading at par (i.e. at its par value). John makes the following statement: the market currently requires a 5.8% return on the bond. If required returns were to increase by 50 bps (or 0.5%), the bond price would drop by $47.62. Dave adds: in that case, a 50 bps (0.5%) fall in the required rate of return would cause the bond price to increase to $1,047.62. With respect to the statements made by John and Dave, which of the following is correct (please show your supporting calculations):
A)Dave is correct with regard to the direction of the price change but incorrect with regard to the new price level of the bond.
B)Both John and Dave are correct.
C)John is correct with regard to the change in the bond price given a 50 bps increase in the rate of return but incorrect with regard to the returns currently required by investors.
D)None of the above statements are correct
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