Problem:
IBM 8% due in 5 years
Assume $1,000 Par or face amount
Assume exactly 5 years to maturity
Cash Flows:
0 $0
1 $40
2 $40
3 $40
4 $40
5 $40
6 $40
7 $40
8 $40
9 $40
10 $1,040
Current Market Interest rate for IBM 7.25%
Price of the bond (today) $1,030.99
What is the value of the IBM bond, given above, if market rates instantanously went to 8.5%?
Compare the IBM bond aboe versus a "zero coupon" bond with the same face value and same YTM. IF rates for both bonds went from the current rate to 5.8%, which would have a higher price change?
What is the rate of return earned for holding the zero coupon bond for 10 years?