Question

Which statement is correct?

		None of these.
		Long-term bonds have lower reinvestment rate risk than short-term bonds.
		Long-term and short-term bonds are equally affected by a chance in interest rates.
		Long-term bonds have lower interest rate risk than short-term bonds.
		Long-term and short-term bonds from the same company have the same default risk.

If Helga Inc. issued a bond that is currently selling for $950 has 7 years left until maturity and currently as a 9.4% yield to maturity. What must the bond’s coupon price be?

		None of these
		$42.05
		$99.37
		$83.93
		$298.66

Answer 1

1) The last statement is correct.

Default risk is the same for bonds from the same company. Other statements are incorrect.

2) There could be two answer depending on the frequency of coupon payments.

Coupon payment can be calculated using PMT function on a calculator

If coupons are paid semi-annually, ,then

N = 7 x 2 = 14, PV = -950, FV = 1000, I/Y = 9.4%/2 = 4.7%

=> Compute PMT = $42.05 would be the semi-annual payment

If coupons are paid annually, then

N = 7, I/Y = 9.4%, PV = -950, FV = 1000

=> Compute PMT = $83.93 would be the annual payment.