Question 2 (Interest Rates and Bonds Valuations) (40%) Assume it is 31 December 2020. An investor has researched two pos

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Question 2 Interest Rates And Bonds Valuations 40 Assume It Is 31 December 2020 An Investor Has Researched Two Pos 1 (111.73 KiB) Viewed 11 times

Question 2 (Interest Rates and Bonds Valuations) (40%) Assume it is 31 December 2020. An investor has researched two possible bond investments; however, some important information is missing in the details of the description of the investment opportunities. The latest coupon on each bond has just been paid. Each bond has a face, or par, value of €1000. The investor assumes that each bond pays coupons annually. Bond Coupon rate ABC 6.50% XYZ 5.00% Maturity 31 December 2026 31 December 2028 Current price ? €968.33 Yield to maturity 5.50% ? a) Complete the table by calculating the current price of bond ABC (10 points) and yield to maturity of bond XYZ (10 points). b) The investor subsequently realizes the ABC bond makes semi-annual coupon payments. Recalculate the current price of the ABC bond. (5 points). c) Assume for ABC corporation only (with the annual coupon), market interest rate increases, which results in increase YTM to 7.50%. What will be the revised current price of the Bond? (10 points) What will you deduce about the relationship between market interest rate and bond prices? (5 points)