Question

Please answer all of the questions!

1. Briefly explain the cash inflows and outflows over the life of a bond from purchase until maturity from the investor’s perspective.

2. What is the difference between the face value and the par value of a bond? Does the investor get this amount back, and if so, at what time?

3. Fill in the blanks of the following sentence. (Hint: For the first blank, choose a different answer than “future” even though “future” is technically correct): The bond price gets closer to the _______ value as the life of the bond _______.

4. Assuming equal face value and coupon payments, would an investor rather have an investment grade bond or a junk bond? Why?

Answer 1

Answer 1)

Cash outflows is the current purchase price of the bond
Cash inflow are
1)  The coupon payments every six months or yearly
2) The reinvestment cash inflows by investing coupon payments
3) The final face value of bond

Answer 2)

The face value or par value are same and is the amount that is given price at contract. Yes the investor gets this amount at the end of the contract ( number of years). If it is a 5 year bond then the investor receives it at the end of 5 the year. In general the face value or par value of bond is $ 1000 or $ 100.

Answer 3 )

The bond price gets closer to the maturity value as the life of the bond increases.

Answer 4)

Given equal face value and coupon payments the investor prefers investment grade bond as the returns are mostly guaranteed. The junk bonds are non investment grade bonds and are likely to default in coupon payments and principal amount.