A Company Issues a Ten-Year $1000 Bond at Par with a Coupon

question 64

Multiple Choice

A company issues a ten-year $1000 bond at par with a coupon rate of 6% paid semi-annually.The YTM at the beginning of the third year of the bond (8 years left to maturity) is 7.8%.What was the percentage change in the price of the bond over the past two years?

• A)11.81%
• B)-43.04%
• C)-10.56%
• D)75.55%
• E)6.57%

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Definitions:

Covariance

Covariance is a measure that indicates the extent to which two random variables change in tandem. A positive covariance means that the variables tend to move in the same direction, while a negative covariance means they move inversely.

Least Squares Line

A straight line that minimizes the sum of the squares of the differences between observed and theoretical values.

Scatter Diagram

A graphical representation of two variables that shows how much one variable is affected by another by displaying data points on a horizontal and vertical axis.

Linearly Related

Describes the direct proportional relationship between two variables, where a change in one variable is associated with a consistent change in another.