# Annual Coupon and Bonds

1. There $1000 face value, 10 year non-callable, bonds have the amount of risk, hence their required rate of return are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is correct?

a. Bond 8's current yield will increase each year.

b. Since the bonds have the same required rate of returns, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.

c. Bond 12 sells at a premium (its price is greater than Par) and its price is expected to increase over the next year.

D. Bond 8 sells at a discount (its price is less than par) and its price is expected to increase over the next year.

E. Over the next year, Bond 8's price is expected to decrease, bond 10's price is expected to stay the same, and Bond 12's price is expected to increase

2. Which of the following issuers of bonds has the least amount of default risk?

a. Corporate

b. Local city government

c. State government

d. Federal Government

e. Foreign Government

3. ABC Company's bond mature in 8 years, have a par value of $1000 and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?

a. 903.04

b. 925.62

c. 948.76

d. 972.48

e. 996.76

4. What is the Price of a Zero Coupon (1000 face value) bond with four years to maturity when the required rate of return is 5%?

a. 822.70

b. 836.53

c. 898.35

d. 932.55

e. 1006.12

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Subject: Business Topic: Finance Level: Year 1

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Annual coupon and bonds

There $1000 face value, 10 year non-callable, bonds have the amount of risk, hence their required rate of return are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

Bond 10: current price $1000; face value = $1000, years = 10, payment = 10%/1000 = $100, current price = $1000 YTM=10%

Bond 8: YTM=10%, face value = $1000, years = 10, payment = 8%/1000 = $80, current price = $877.11

Current price Bond 12: YTM=10%, face value = ...

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