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The price of a two-year 6% coupon bond was $100 on January 27 company issued a press-release...

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Accounting

The price of a two-year 6% coupon bond was $100 on January27
company issued a press-release where it announced that theprevious CEO would resign and would be replaced by a moreexperienced one. That day the YTM of the bond became 5%, while onJanuary 29th and afterwards the YTM reached 4%.Calculate the pricesof the bond on January 28 and 29 . For simplicity of calculationsignore small
changes in time to maturity.
Plot the graph of the price dynamics (price on the Y axis andtime on the X axis) on the date of the announcement and on the daysfollowing the announcement. Plot and explain the graph of theprices that you expect to see if the market was perfectlysemi-strong form efficient. What is the name of the effect that youobserve?

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Answer & Explanation Solved by verified expert
4.2 Ratings (487 Votes)
Given Coupon rate6 Face Value of Bond100Lets first understand some common terms used in thisquestionYield to maturityYTMTotal return expected on a bond if thebond is held till maturityCoupon rateInterest rate on Bond calculated at Face Valuealways usually fixed throughout the bond periodNOWCurrent yield of BondFace ValueCoupon    See Answer
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