Question

13. Consider a bond with a principal of £3000, a maturity of 20 years, and a coupon rate of 2%. Coupon payments occur yearly and the first coupon payment arrives exactly one year from now. Which of the following statements is not correct?

    1. a) If the market interest rate is 5%, and if the bond’s price is equal to its present value computed at the market interest rate, the yield of the bond is 5% and it trades at a discount.

    2. b) If the yield of the bond is 8%, the market price of the bond lies between 1200 and 1250.

    3. c) If the yield of the bond is 12%, the market price of the bond lies between 700 and 750.

    4. d) If the market interest rate is 7%, the present value at this interest rate lies between 1400 and 1450.

    5. e) If the market interest rate is 7%, and the yield of the bond is 6%, the bond’s market price is higher than present value computed at the market interest rate.

Answer 1

Bond Par Value = 3000

Coupon Rate = 2%

Time to maturity = 20 years

Option c is correct

Using TVM calculation,

PV = [FV = 3000, T = 20, PMT = 60, I = 12%]

PV = $759.17

So, at Yield of 12% Present Value of Bond = $759.17 which does not lie between 700 and 750

Option c is correct.