Exercise 2 In the cases when the required return is equal to the coupon interest rate, the bond value is greater or smaller than its PAR value? Explain your answer and discuss the concept behind that relationship.

Price of bond today = C* (1-(1+r)-n/r) + F/(1+r)n C = Coupon rate N = maturity period R = required rate of interest The bond price is affected by the yield on the bond /required rate of return. As the bond yield is the discount rate used to discount the future cash flow of the bond. Bond yield and bond price has an inverse relationship, if bond yield decrease the price of a bond will be higher, and vice versa. If bond Coupon = required rate, then the bond is issued at par, If the bond Coupon > the required rate, then the bond is issued at par, If the bond Coupon < the required rate, then the bond is issued at a premium, Reason – If bond coupon = required rate of return, then the bond is at par because the future cash flow is discounted at the same rate at which we are earning interest from the bond.

Exercise 2

Get Instant Homework HelpOn Your Mobile

Get Instant Homework HelpOn Your Mobile

Get Instant Homework HelpOn Your Mobile