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Finance Assignment 2 problem

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Question;Question 1: Bonds (5 marks total)Two outstanding government bond issues are identical except that one has 2 years to maturity and the other has 5 years to maturity. Each bond has a face value of $100, an AAA credit rating, fixed semi-annual coupons, a current price of $100 and a yield to maturity of 12% p.a.Based on this data, answer each of the following:(a) What is the annual coupon rate on each of these bonds? Explain. (0.5 marks)(b) The Reserve Bank of Australia announces a decrease in the cash rate and as a result interests rates fall market wide. If the required yield to maturity for the two government bonds falls to 10% p.a., what will be the price of each bond? (2 marks)(c) The Reserve Bank of Australia announces an increase in the cash rate and as a result interests rates rise market wide. If the required yield to maturity for the two government bonds rises to 14% p.a., what will be the price of each bond? (1 mark)(d) Explain, with reference to relevant bond valuation concepts, the relative changes in price of the two bonds in response to changing interest rates. (1.5 marks)

 

Paper#48374 | Written in 18-Jul-2015

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