The following is the data on RM1,000 par value bonds issued by LOW Co., HIGH Co. & MEDIUM Co. at the end of 2015. Assume that you are thinking of buying these bonds as of January 2016. Answer the following questions for each of the bonds.
(a) Calculate the values of the bonds if your required rates of returns are as follows: LOW Co; 6%, HIGH Co. 9%; & MEDIUM 8% LOW Co. HIGH Co. MEDIUM Co. Coupon Interest Rate 7.8% 7.5% 7.975% Years to Maturity 10 17 4.
(b) In December 2015, the bonds were selling for the followings amounts: LOW Co. RM 1,030. HIGH Co. RM 973 MEDIUM Co. RM 1,035 What were the expected rates of return for each bond?
(c) How would the values of the bonds change if: (i) Your required rate of return increases by 3% points? (ii) Your required rate of return decreases by 3% points?
(d) Explain the implications of your answers in question (b) and (c) as they relate to interest rate risk, premium bonds and discount bonds.
(e) Compute the duration for each of the bonds. Interpret your results.
(f) What are some of the things you can conclude from the above computations?
(g) Should you buy the bonds? Explain.