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A) Which bond offers the lowest yield to maturity? (The par value of bonds are $1,000) B) Which bond will most likely experience the smallest percent change in price if the market discount rates for all three bonds increase by 100 basis points? (100 bps is translated into 1%) (The par value of bonds are $1,000)
A) Which bond offers the lowest yield to maturity? (The par value of bonds are $1,000)
B) Which bond will most likely experience the smallest percent change in price if the market discount rates for all three bonds increase by 100 basis points? (100 bps is translated into 1%) (The par value of bonds are $1,000)
Expert Solution
1.
A bond trades above par when coupon rate is more than yield to maturity
Yield to maturity of Bond A is less than 5%
A bond trades at par when coupon rate is equal to yield to maturity
Yield to maturity of Bond A is equal to 6%
A bond trades below par when coupon rate is less than yield to maturity
Yield to maturity of Bond A is more than 5%
Bond A offers the lowest yield to maturity
2.
Duration decreases with decrease in maturity and increase in coupon rate. Bond B has the lowest duration and hence the smallest percentage change in price
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