[SOLUTION] Maturity of Bond

Assume it is 1 January 2017. An investor has researched two possible bond investments, but an intermittent printer fault has caused some important information to be missing from the printout. The latest coupon on each bond has just been paid. Each bond has a face, or par, value of £1000. The investor assumes that each bond pays coupons annually.Bond Coupon rate Maturity Current price Yield to maturity ABC 3.50% 31 December 2022 ? 4.50% XYZ 2.45% 31 December 2024 £898.45 ? · i. Complete the table by calculating the current price of bond ABC and yield to maturity of bond XYZ (10 marks).· ii. The investor subsequently realises that the printer had not detailed the fact that the ABC bond makes semi-annual coupon payments. Recalculate the current price of the ABC bond. (10 marks)iii. Analyze the answers in (i) and (ii) above as an investor. Which coupon option would you choose and why? (10 Marks).iv. Assume for ABC corporation only, market interest rate increases, which results in increase YTM to 6.50%. What will be the revised current price of the Bond? What will you deduce about the relationship between market interest rate and bond prices? (10 Marks)

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