Two bonds have the following terms: bond b has an additional features. It may be redeemed at par after five years (i.e. it has a put feature). Both bonds were initially sold for their face amounts (i.e. $1,000)
a. If interest rates fall to 7 percent, what will be the decline in the price of each bond from its initial price?
b. If interest rates rise to 9 percent, what will be the decline in the price of each bond from its initial price?
c. Given your answers to questions (a) and (b), what is the trade-off implied by the put option in bond B?

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Originally Posted by Curlyben

What do YOU think ?
While we're happy to HELP we wont do all the work for you.
Show us what you have done and where you are having problems..

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c. the implied trade-off is that Bond B offers less interest, but if interest rates were to rise, its prices declines less. Bond B is safer.
d. The present value of the $4 foregone annually for ten years when the interest rate is 8 percent is $4(6.710)-$26.34
The value of the bond is reduced by this to $973.15

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Originally Posted by startigger2

a.What is the current price of the bond if comparable yields are 7 percent?
principal: 362.45 interest 910.79 total 1,273.24

b. What are the current yield and yield to maturitygiven the price of the bond in the previous question? 7%
c. the implied trade-off is that Bond B offers less interest, but if interest rates were to rise, its prices declines less. Bond B is safer.
d. The present value of the $4 foregone annually for ten years when the interest rate is 8 percent is $4(6.710)-$26.34
The value of the bond is reduced by this to $973.15

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this is the answers