You are analyzing the following US corporate bonds and both are issued by the same company. (Hint: US corporate bonds pay interest semi-annually)
Bond Price (as % of par) Coupon (%) Maturity (years)
A 100.00 3 20
B 55.13 0 20
a. If interest rates move up by 0.5% (50 basis points), how much will the value of each bond change (in %)?
b. If you expect interest rate to fall over time, which bond would you invest in?
c. You decide to purchase $1,000,000 worth of bond B, if the par value of each bond is $1,000 how many bonds must you buy (ignore any transaction costs)?
d. If you invest in bond B, how much will it be worth 2 years later if the appropriate yield for this bond then is 3.5%?