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Advice on 10 Year Bond Market

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Q: Suppose a 10-year bond is issued with an annual coupon rate of 8 percent when the market rate of interest is?
also 8 percent. If the market rate rises to 9 percent, what happens to the price of this bond? What happens to the bond’s price if the market rate falls to 6 percent?

A: “If the market rate rises to 9 percent, what happens to the price of this bond?”
It falls.

“What happens to the bond’s price if the market rate falls to 6 percent?”
The price of the bond rises.

Q: . If the market rate of interest is 6%, a $10,000, 10-year bond with a stated annual interest rate of 8% would?
. If the market rate of interest is 6%, a $10,000, 10-year bond with a stated annual interest rate of 8% would issue at an amount:
a. less than face value.
b. equal to the face value.
c. greater than face value.
d. that cannot be determined

A: Investors would be willing to pay a premium — a price greater than a bond’s face value — to purchase this bond because it pays an above-market interest rate.

Q: issue 300,000 of 9% bond, due in 10 year,with interest payable semiannually. At the time of issue, the market?
issue 300,000 of 9% bond, due in 10 year,with interest payable semiannually. At the time of issue, the market rate such as bond 10%. Compute the issue price of the bond?

A: ok

Q: 3 year coupon bond with a coupon rate of 7% and a face value of $10,000. market interest rate is 9%?
1) How much are you willing to pay for the bond?

2) Suppose through open market operations, interest rates are forced down. one year after you purchased the bond, the market interest rate is 5%. how much is a buyer willing to pay you for that bond?

3) What would be the rate of return for this bond?

Thank you!

A: do you own homework.

do yourself a favor and learn how to use a TI BA-II Plus, or HP 12-C.

Q: If the market interest rate is 10%, a $10,000, 12%, 10-year bond, that pays interest semiannually would sell ?
a.less than face value.
b.equal to face value.
c.greater than face value.
d.that cannot be determined.

A: The obvious answer is C. However there are many factors to consider.
These may include bond rating(safety),demand,tax status,etc.

Q: An investor is interested in purchasing a new 20-year government bond carrying a 10 percent annual coupon rate?
with interest paid twice a year. The bond’s current market price is $875 for $1,000 par value instrument. If the investor buys the bond at the going price and holds to maturity, what will be his or her yield to maturity? suppose the investor sells the bond at the end of the 10 years for $950. What is the investor’s holding-period yield?

A: I am assuming for this question you have and know how to use a financial calculator, because this would be very difficult without one.

To first find the yield to maturity we simply fill the values into our calculator:

FV = 1000
PV = -875
N = 40 (because they are semi annual coupons, we have 40 payments)
PMT = 50 (semi annual coupons, so you divide the annual coupon by 2)

Solve for I/Y and you get 5.81%, which is your yield to maturity

Now if we were to sell the bond after 10 years,

We simply change:
N = 20 (we only received 20 payments)
FV = 950 (we are selling for 950)

We solve again for I/Y and get 5.95%, which is the holding-period yield.

Q: what is the impact of a higher Yield on 10-year Treasury Bond to the bond , equities and forex market?

A: Higher Yield securities represent the riskiest companies, projects, etc, and therefore compete with other risky investments, such as equities. For instance, if you are a risk taker, and Delta Airlines offer you a bond that pays you 15% a year, then you may consider it buying it, and selling your Cisco shares that may give you that return. The impact on the 10-Years are less significant than other riskier investment, however, when higher yields are going up in prices, it means that the yields are going down, which produces some preasure to other fix income investments. Forex markets are a completely different animal. They don’t correlate with anything.

Q: What is the market price of the bond when publicly traded?
Bexx Plc. has issued a 10-year corporate bond with a par value of £100 and a 9% annual coupon rate. Assume your required the rate of return of this bond is 10%. The market required rate of return or yield-to-maturity (YTM) of this bond is estimated to be 8.5% and is assumed to remain constant.
can you show me how this calculation is done?

A: If you want a simple 10% return (ignoring inflation etc) then you should purchase only when the Bond falls to £90 or below.

A £100 Bond paying 9% will yield £9 a year .. if you want this to be10%, then you have to wait for the Bond to fall to £90 (£9 is 10% of £90)

If the market currently prices the Bond at 8.5%, then the current market value will be approx £105.88 (£9 is 8.5% of 105.88)

Q: Is now the time to get into the bond market?
The 10-year bond is up over 5%, to add to some long term short term investments, is now a good time to get in on bonds or will they continue to rise?

A: It might be a better time to get out of the bond market. 6 mo T-bills pay 5%. Why tie your money up for 10 years and risk that interest rates might go up to 8% long term. That is probably where they should be.

Q: Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the current market price ?
of a $1,000 face value bond?
a.$430.24
b.$473.26
c.$835.56
d.$919.12
e.$1,088.00

A: The issuing price of zero-coupon bonds is the present value of their face amount.

Present value of $1,000 due in 10 years at 8.8% = ( $1,000 x 0.43024 ) = $ 430.24
—————————–
To find the factor, use the formula for present value of $1

PV = [ 1 / (1 + r)^n ]

= [ 1 / (1.088)^10 ]

= 0.43024

Q: Calculate the duration of five year maturity bond that pays a 10 % annual coupon. The market yield is 8 %.?
This has to be done in excel. Calculate the change in the bond price when the yield increases up tp nine percent. This finance chapter is about duration.

A: The duration is 4.20 years. The Excel formula is:
=DURATION(DATE(2007,1,1),DATE(2011,12,31),10%,8%,1)

The change in price is 4.09 points. The Excel formula is:
=(PRICE(DATE(2007,1,1),DATE(2011,12,31),10%,8%,100,1))-(PRICE(DATE(2007,1,1),DATE(2011,12,31),10%,9%,100,1))

Q: What Would Happen If The Bond Market Crashed?
What would be the effect on the stock market and commodities such as gold, silver, and oil if the US Treasury Bond Market were to crash? It is said to crash in the future and that the recent strength in the US dollar is due to failed auctions of 10 and 30 year Treasury bonds causing the rates to rise.

A: First of all, what Treasury auctions failed?

“It is said to crash in the future”
By whom? Do you have an article or editorial by someone with any credentials that suggests this?

“and that the recent strength in the US dollar is due to failed auctions of 10 and 30 year Treasury bonds causing the rates to rise.”

When? Have you seen or do you watch the yields on these securities? The yield on the 30 year is lower now than it was at the beginning of January. Same with the ten year.
http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml
If auctions had failed, the rates would have climbed, not fallen.

If by “crashed” you mean that auctions become completely unsubscribed or that no one will buy any maturity US Debt paper at any price, the effect would be worldwide and catastrophic, gold would easily double and all hell would break loose! But this isn’t likely to happen, regardless of what many doom and gloomers have to say.

The Treasury Bond market, like almost all bond markets, is self correcting, meaning that if investors aren’t willing to settle for current yields, prices will fall until the yields are more attractive and then buyers will flock back in. In the early 1990’s, the coupon on 30 year Treasury paper was 8%, so at current coupon rates (4.375%) the US Treasury is borrowing long term money at a historically low rates. They are able to borrow very short term money for virtually nothing, as the yield on 90 day paper is at .07%. To put that in terms of real dollars, if you bought 90 day paper and rolled it out for a whole year at current yields, the profit you will realize (or the interest you will be paid, if you prefer) on a $1,000.00 face value note is a grand total of SEVENTY CENTS!

http://www.bloomberg.com/markets/rates/index.html

The fact that yields are so low indicates there is PLENTY of demand for this paper because if there wasn’t, yields would be much, much higher.

Q: on january a company issued $500000, 10-year bonds for $574540. the face rate is 8% market rate 6%.?

A: What is your question? The journal entry for the issuance of the bonds:
Dr Cash $574,540
Cr Bonds premium $74,540
Cr Bonds payable $500,000

Q: 10 yr 10% 100,000 bond at market 15% issued at 74910 When does the value = 79204? Year 1, 2, 3, or 4?

A: Difficult to say. It depends on what the bond market is like in 1, 2, 3 or 4 years and whether the company lasts that long or not. It also depends on the maturity of the bond, which you have not mentioned.

Q: What is the yield on this 5-year corporate bond?
A 5-year Treasury bond has a 5.2 percent yield. A 10-year Treasury bond yields 6.4 percent, and a 10-year corporate bond yields 8.4 percent. The market expects that inflation will average 2.5 percent over the next 10 years (IP10 _ 2.5%). Assume that there is no maturity risk premium (MRP _ 0), and that the annual real riskfree rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP _ LP _ 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described above. What is the yield on this 5-year corporate bond?

A: around 5

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