Course Project 1

The bonds can be issues with fixed interest or variable rate interest, each of which has its advantages and there disadvantages.

Bonds are a debt investment, meaning the purchaser of the bond is loaning money to the company or government for a set period. They have a fixed interest rate, meaning the investor knows how much interest will be earned on the loan since the rate will not change.

If rates increase, then both bonds lose value because they are discounted at a higher rate. But the inverse Floater will also lose value because the coupon payments decrease. The opposite holds when rates decrease. Therefore, the price impact is greater for Inverse Floaters than for Straight Bonds.

For example, stocks traditionally have a potential for higher return than bonds over time because stocks are usually a riskier investment than bonds.

Answer: The Coupon Rate is a generally fixed and is known as the stated rate of a bond that determines the periodic interest payments. As stated in the textbook, the annual coupon dividen by the face value is called the coupon rate of the bond. The YTM rate of return anticipated on the bond if it is held until the maturity Date. YTM is considered a long-term bond yield expressed as an annual rate.

c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated)

3. Assume that 11% is the market rate of interest in on January 1, 1975. Compute the present value at January 1, 1975 of all payments that will be made on

I think that between National First and Regions Best that National first offers the lower rate after computing the EAR. National first is also only compounded semiannually making it lower then Regions Best. The only thing I worry about it the prime rate changing because if it rises a lot then it could possibly become a higher interest rate them Regions best. At the time being if Air jets Best Inc. takes the National First option then that is 3.74 percent less they would be paying if they had gone with

The risk of a large price drop if the bond must be sold quickly or the inability to sell quickly without incurring a large price drop.

This bond increased in value because you owned a bond with a fixed interest rate of 9.5 percent interest during a time period when interest rates in the economy were declining.

It shows that price of bonds at a lower amount will increase the demand of those items.

If the company benefits from the provision of the bond, then the coupon rate will be higher. If the bondholder’s benefit, then the bond will have lower coupon rate.

It provides an evaluation of the bond issuer’s financial strength and ability to pay back the bond’s principle and interest. The bond rating also provides investors with some sense of security when investing in a particular firm. A higher bond rating implies a lower likelihood for the firm to default. Investors would feel more secured investing in such a bond, thus demanding a relatively lower rate of return. As such, high rated bonds enable the issuer to enjoy a lower cost of borrowing. A lower bond rating, on the other hand, serves as a negative signal to investors on the firm’s ability to repay debt obligations.

of a bond changes as interest rates change. Although investors have no control over the change

1.b.Maturity risk premiums. The increase in the yield for the bonds corresponds with the longer maturities. Therefore, in all likelihood the premium reflects increased risk for bonds with a longer time frame.