Suppose that you are reviewing a price sheet for bonds and see the following prices (per $100 par value) reported. You observe what seem to be several errors
Without calculating the price of each bond, indicate which bonds seem to be reported incorrectly, and explain why.
Bond Price Coupon Rate (%) Required Yield (%)
U 90 6 9
V 96 9 8
W 110 8 6
X 105 0 5
Y 107 7 9
Z 100 6 6
If the required yield is the same as the coupon rate then the price of the bond should sell at its par value. This is the case of bond Z since par values are typical at or near a $100 quote. If the required yield decreases below the coupon rate then the price of a bond should increase. This is the case for bond W. This is not the case for bond V so this bond is not reported correctly. If the required yield increases above the coupon rate then the price of a bond should decrease. This is the case for bond U. This is not the case for bonds X and Y so these bonds are not reported correctly. Thus, bonds V, X, and Y are incorrectly reported because the change in the bond price is not consistent with the difference between the coupon rate and the required yield.
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