Question

1. A bond has a face value of $1,000, a coupon rate of 8%, and a maturity of 10 years. It pays interest annually, and the yield to maturity is 12%. In WORDS (1-2 complete sentences each) answer the following questions.

1. What does it mean that the bond above has a face value of $1,000?

2. What does it mean that the bond has a coupon rate of 8%?
   
3. What does it mean that the bond has a maturity of 10 years?
   
4. Explain the difference between coupon rate and yield to maturity.

5. What happens to bond price as yield to maturity increases? Explain why.

6. What does it mean if the bond has a rating of AA?
   
7. What does it mean if the bond has an offer price quoted as 96.250?

8. What does it mean to say that the bond is traded over-the-counter OTC?

Answer 1

1.

It means that Bond will pay $1,000 at the maturity of the bond

2.

Coupon Rate = 8% means bond will pay Interest annually of amount 0.08(1,000) = $80

3.

Bond has maturity of 10 years, it means that bond will pay interest based on coupon rate annually till maturity and at maturity bod will pay face value.

4.

Coupon Rate is the interest paid annually and yield to maturity is the realized return on holding the bond, YTM is affected by buying price of bond but coupon rate is fixed.