# Questions and Answers “Accounting paper”

A bond pays an 4.5% semi-annual interest and matures in 2 years.  If the going rate for the bond is currently 5.5%, what is the price of the bond?

You are evaluating three bonds and would like to purchase one.  You think interest rates will increase next year and you want to take advantage of this interest rate change in your portfolio value. The bonds have the following characteristics and pay annual coupons.

 Time to maturity Coupon rate Discount rate Bond A 2 years 4% 5% Bond B 3 years 8% 12% Bond C 2 years 0% 8%

Which bond would benefit you the most if interest rates change?  (hint- you need to calculate duration).

In the United Kingdom, there is something called a Consul bond which pays a coupon in perpetuity.  What is the price of a 5% coupon rate Consul bond on a \$1000 face bond with an 8% discount rate?

Suppose you purchase a bond (\$1000 face) with a 5% coupon, a 4.5% discount rate, and 4 years to maturity.  Next year after you collect the coupon, you sell the bond when it has a discount rate of 5.5%.  What is your overall return on this investment?  Assume the bond pays an annual coupon (hint – you need to calculate the bond price at time =0 (today) and at time = 1 (next year).  Then calculate your returns based on the cash flows.)

The IRS considers a zero coupon to be “paying interest” at the rate of the discount of the bond on an annual basis and requires the investor to pay taxes at this rate.  If a zero coupon bond has a discount rate of 9% on a 1000 face and has a maturity of 12 years, what is the price today?  What is the gain the IRS will expect you to pay taxes on if you hold the bond for the next year?

If you buy an 8% coupon bond at face value and hold it for 10 years, what will be your return on the bond?  Suppose in year 5, the going rate for the bond goes from 8% to 7%.  If you hold the bond to maturity, what will be your return on the bond?  (assume no default)

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