Explore BrainMass

Explore BrainMass

    Interest Rate Risk and Bond Pricing

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Two years ago your corporate treasurer purchased for the firm a 20-year bond at its par value of $1,000. The coupon rate on this security is 8 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9 percent. A cash shortage has forced you to instruct your treasurer to liquidate the bond.
    a. At what price will your bond be sold? Assume annual compounding.
    b. What will be the amount of your gain or loss over the original purchase price?
    c. What would be the amount of your gain or loss had the treasurer originally purchased a bond with a 4-year rather than a 20-year maturity? (Assume all characteristics of the bonds are identical except their maturity periods.)
    d. What do we call this type of risk assumed by your corporate treasurer?

    © BrainMass Inc. brainmass.com June 4, 2020, 1:26 am ad1c9bdddf
    https://brainmass.com/business/interest-rates/interest-rate-risk-bond-pricing-400211

    Solution Preview

    Two years ago your corporate treasurer purchased for the firm a 20-year bond at its par value of $1,000. The coupon rate on this security is 8 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class are yielding investors 9 percent. A cash shortage has forced you to ...

    Solution Summary

    The problem deals with estimating the gain/loss on a bond and determining the price of a bond.

    $2.19

    ADVERTISEMENT