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The market rate of interest for a certain class of debentures is 4 per cent....

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Finance

The market rate of interest for a certain class of debentures is 4 per cent. It is possible to identify the following four debentures in the market that meet the requirements of the class. The face value of these debentures is $100.

Coupon rate on issue

%

Big Gun

3.5

Toy Soldier

3.0

Rumbler

5.0

Gatsby

6.0

  1. If the only characteristic of the debentures that is different is the coupon rate, rank the debentures from high to low in terms of market price. [2 marks]

  1. How would the ranking change (if at all) if the terms to maturity are as follows? (Hint: Calculate PVs first.) [5 marks]

Big Gun

3 years

Toy Soldier

6 months

Rumbler

2 years

Gatsby

1 year

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