Assume That the Microsoft Bonds Have a Face Value of $1,000,5-Years

question 48

Multiple Choice

Assume that the Microsoft bonds have a face value of $1,000,5-years to maturity and pay annual coupons of $100.The next coupon is due in one year.The yield on equivalently risky corporate bonds is currently 5%.Assume the yield stays at 5% over the life of the bond.Determine the price of the bond today and after each of the first four coupon payments.Plot those prices on a graph with price on the y-axis and time on the x-axis.(The x-axis starts at time 0 and ends on the date of the fourth coupon.) What do you note about the time path (slope of the line) of the bond price?

• A) It is upward sloping.
• B) It is downward sloping.
• C) It is a horizontal line.

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