Bond A
Bond B
Unit
Maturity
4
7
Years
Coupon
5%
6%
Annual
Price
101.79
102.85
–
You know for certain that the 3 year rate in 4 years will be 8% (annually compounded).
Would it be better to buy bond A or purchase bond B hold it for 4 years and sell it? Justify you answer.
Problem 2
Reinegar Corporation’s has just issued a 25 year par bond with a 10% semi-annual coupon. The company’s bankers assure Rienegar management that it can raise $3,000,000 by issuing 25-year Original Issue Discount (OID) bonds bearing a 6.25% semiannual coupon. What will be the par value of the OID issue?
