Bond P is a 12 percent coupon bond that is selling at a premium

Finance Oct 24, 2020

Bond P is a 12 percent coupon bond that is selling at a premium. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make semi-annual payments, have a YTM of 9 percent and have 5 years to maturity.

a. What is the current yield for bond P? (3 marks)

b. What is the current yield for bond D? (2 marks)

c. Assume the YTM (yield to maturity) decreases to 8%. Which bond is more sensitive to changes in the market interest rate making the bond riskier? Show your work! (6 marks)

Expert Solution

When the YTM decreases to 8%, Bond D is more riskier than Bond P. This is because lower the coupon rate on a bond, the more sensitive is it's price to a change in interest rates.

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