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Coupon and Coupon Rate

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1. Suppose you decided to invest and these were your choices.
(A)Which investments would you choose to maximize your expected return for stocks, bonds or commodities?
(B)If you are risk-averse and had to choose between the stock or the bond investments which would you choose and why

2. If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
A) $650
B) $1,300
C) $130
D) $13.

3. With an interest rate of 6 percent, the present value of $100 next year is approximately
A) $106
B) $100
C) $94
D) $92.

4. If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is
A) -3 percent
B) -2 percent
C) 3 percent
D) 7 percent.

5. Which of the following $5,000 face-value securities has the highest yield to maturity?
A) A 6 percent coupon bond selling for $5,00
B) A 6 percent coupon bond selling for $5,500
C) A 10 percent coupon bond selling for $5,000
D) A 12 percent coupon bond selling for $4,500.

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Solution Preview

#1. Given the opportunity, the investor who is willing to take on risk would choose the stock option rated first on the chart and the commodity option also shown first on the chart. The principle involved is the risk/reward concept which states that if the investor is willing to take a higher risk, then the expectation is for the higher reward (even though there might be negative consequences for a high risk position), the way to MAXIMIZE return is through a combination of taking controlled risks ...

Solution Summary

These are answers to questions dealing with time value of money, risk and reward, interest rates, and the relation between interest rates and bond values.

See Also This Related BrainMass Solution

Skitman Corp issued bonds: What is YTM? The coupon rate? The required return? Risk?

1. Skitman Corp. issued 12-year bonds 2 years ago at a coupon rate of 9.2 percent. The bonds make semiannual payments. If these bonds currently sell for 104 percent of par value, what is the YTM?

2. Interpreting Bond Yields: Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond then? The YTM?

3. Interest Rate Risk: Bond J is a 4 percent coupon bond. Bond K is a 12 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?

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