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Explain why market interest changes are reflected in bond prices.

Instructions

Answer the following questions and complete the following problems, as applicable.

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

  • Question 1:
    • Proficient-level: “What does a call provision [call feature] allow [bond] issuers to do, and why would they do it?” (Cornett, Adair, & Nofsinger, 2016. p. 184).
    • Distinguished-level: State what additional compensation is paid, in addition to the bond principal, when a bond is called.
  • Question 2:
    • Proficient-level: “Provide the definitions of a discount bond and premium bond. Give examples” (Cornett, Adair, & Nofsinger, 2016, p. 184).
    • Distinguished-level: Explain why market interest changes are reflected in bond prices.
  • Question 3:
    • Proficient-level: “Describe the differences in interest payments and bond prices between a 5 percent coupon bond and a zero coupon bond” (Cornett, Adair, & Nofsinger, 2016, p. 184).
    • Distinguished-level: Given a change in market interest rates, determine which of the two bonds would remain closer to its par value.
  • Question 4:
    • Proficient-level: “Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 3.8 percent” (Cornett, Adair, & Nofsinger, 2016, p. 185).
      • Assume semi-annual compounding.
    • Distinguished-level: State why zero coupon bonds are sold at steep discounts.
  • Question 5:
    • Proficient-level: “Compute the price of a 3.8 percent coupon bond with 18 years left to maturity and a market interest rate of 6.8 percent” (Cornett, Adair, & Nofsinger, 2016).
      • Assume interest payments are paid semi-annually, and solve using semi-annual compounding.
    • Distinguished-level: Explain why the bond is either a discount bond or a premium bond.
  • Question 6:
    • Proficient-level: “A 5.65 percent coupon bond with 18 years left to maturity is offered for sale at $1,035.25. What yield to maturity [interest rate] is the bond offering?” (Cornett, Adair, & Nofsinger, 2016, p. 186).
      • Assume interest payments are paid semi-annually, and solve using semi-annual compounding.
    • Distinguished-level: Explain what effect a decrease in the offered sales price would have on the yield to maturity.

Submit your completed assignment as an attachment in the assignment area. You may use either a Word document or an Excel spreadsheet for your work, but not both. Prior to submitting your assignment, review the Valuing Bonds Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work.

Reference

Cornett, M. M., Adair, T. A., & Nofsinger J. (2016). M: Finance (3rd ed.). New York, NY: McGraw-Hill.


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