Problem
Suppose Unilever Plc issued bonds with 10 years to maturity with a £1,000 par or face value, a 10% coupon rate paid semi-annually are currently selling for £550. Answer the following questions.
1. Two years after the bonds were issued; the yield on bonds of the same credit standing fell to 6%. What would be the price of their bonds now?
2. What is the duration of these bonds now?
3. Suppose that, 2 years after the bonds were issued, the yield on such bonds rose to 12%. What price would the Unilever bonds sell now?
4. Suppose that two years after the bonds were issued, the going rate of interest for bonds of the same credit standing fell to 6% but suppose further that the interest rate remained at 6% for the next eight years. What would happen to Unilever bonds over time?
5. Given the fact that bond prices adjust to the equilibrium rate of market interest, from the perspective of an investor, is it better to have bonds in which most of the return is in the Coupon or in the Discount?