Question 2
a) Assume a US bond with a face value of $1000 that bears a 5% annual coupon and has 10 years to maturity.
Required:
i) Determine the current price of the bond, given that its current Yield to Maturity (YTM) is 6%.
ii) if the YTM falls to 4%, what would the price of the bond be?
iii) What do the above results indicate about the relationship between the price of a bond and its YTM?
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b) Assume a bond that promises eight annual coupon payments of $70 and will repay its face value of $1000 at the end of the eight-year period. Assuming that you are offered the bond for a price of $1035.94, use detailed workings to compute the implied YTM.
c) As a Financial Analyst, you have been approached by an investor seeking to understand the extent to which stock prices reflect all available information and how quickly they adjust to new information. Identify the three forms of the (informational) Efficient Market Hypothesis and discuss the differences between them.
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