Items 1 through 3 are based on the following information:
Watco, Inc. issued $1,000,000 in 8% bonds, maturing in ten years and paying interest semiannually. The bonds were issued at face value.
What can you assume about the interest rates at the time the bonds were issued?
- The market rate for this bond was about 8%.
- The nominal rate of interest was about 8%.
- The coupon rate on the bond includes no premium for credit risk.
- The risk-free interest rate is about 6%
If the market rate of interest for this type of bond increases to 9%, which of the following is true?
- The market value of Watco’s bond will increase.
- The market value of Watco’s bond will decrease.
- The effect will depend on the change in the LIBOR rate.
- The effect cannot be predicted.
Assume that one of Watco’s bonds with $1,000 face is currently selling for $950. What is the current yield on the bond?
- 8.00%
- 9.00%
- 7.56%
- 8.42%