1.Explain the relationship between a bond’s fixed coupon rate and its yield to maturity. (2 marks)
2.An 8 year bond has a yield to maturity of 6%. Which would result in the smallest % change in the bond’s price, a rise to 7% or a fall to 5%? Why? (2 marks)
3.Suppose a recently published report indicates inflation in both Canada and the U.S. is becoming excessive and the Canadian dollar is weakening. You hear a news report that the bond prices are falling. Which of the following Canadian bonds would experience the lowest % price decrease? Why? (4 marks)
i. Low coupon, short-term
ii. High coupon, long-term
iii. High coupon, short-term
iv. Low coupon, long-term
Calculation Questions
- Calculate the price of these bonds. SHOW YOUR WORK. (4 marks)
a) 4-year Quebec 6.00% semi-annual, $100 par value. Investors require a yield to maturity of 7% compounded semi-annually.
Mode=
N=
P/Y =
C/Y=
I/Y=
PMT=
FV=
PV =
b) 4-year Government of Alberta strip bond, $100 par value. Investors require a yield to maturity of 7% compounded annually.
Mode=
N=
P/Y =
C/Y=
I/Y=
PMT=
FV=
PV =
Sample Solution