Answer to Question #196962 in Marketing for saleemaslam

Question

 

1.     What is a coupon bond? Describe its basic properties.

 

2.     Would it make sense to buy a house when mortgage rates are 14 percent and expected inflation is 15 percent? Explain your answer.

 

 

  3.     A friend tells you that he can purchase a 10 percent coupon bond at face value. Your friend states that 10 percent is a "high" rate of interest. You know that the current rate of inflation is 8 percent, and you expect inflation to increase. What advice should you give to your friend about this bond?

Answer 1

Answer

1.A coupon bond is a type of bond that includes attached coupons and pays periodic typically annual or semi-annual. its basic properties involve;

        I.           it is expressed as a percentage of the face value and paid from the issue date until maturity.

      II.           It comes with a coupon rate which refers to the bond yields at the date of issuance.

    III.           When a coupon bond is priced at its face value, the yield to maturity equals the coupon rate.

2.This is because the face value security of the mortgage rate has a higher yield. 

3.I would advise my friend that the expected increase in rate of inflation would decrease the long term bond returns more than the short term bond returns.