Compare the current yield to the yield to maturity

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Reference no: EM133207623

Assignment:

1. Go to a website of your choice and search for Canada Bonds.

Choose 5 different Canadian bonds withthe following characteristics:

• One Federal government bond trading at a premium with more than ten years to maturity

• One Federal governmentbond trading at a discount withany maturity

• One corporate bond trading at a discount with less than ten years to maturity

• One corporate bond trading at a premium with more than ten years to maturity

• One Provincial government bond trading at a premium with any maturity

a. For each bond, calculate the current yield.

b. Compare the current yield to the yield to maturity. or which bonds is current yield closer in value to the yield to maturity? Explain.

2. A bond with $1,000 face value, 6% coupon, market interest rates of %7, and three years to maturity.

a. Calculate the duration of the bond

b. Assume that market interest rates increased to 10%, re-calculate the duration of the bond

c. Assume that the market interest ratesincreased to 15%, re-calculate the duration of the bond

d. Comment generally on the relationships between the interest rates, coupons, and duration

3. A $1000 face value bond has a 10% coupon rate, its current price is $960, and its price is expected to increase to $980 next year.

Calculate the current yield, the expected rate of capital gain, and the expected rate of return.

4. If there is a decline in interest rates, which would you rather be holding, a long-term bond or a short-term bond? Explain.

5. Albert, a financial advisor in greater Halifax area,has just emailed his clients giving them the following advice: "there is no doubt that long-term bonds are a great investment because their interest rates are over 20%." Comment generally on Albert's advice. Do you agree him? Disagree? Or uncertain?

6. If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Explain.

7. Why might you be willing to make a loan to your neighbour by putting funds in the bank and having the bank lend her the funds at 10% interest rate, rather than lend her the funds yourself?

Reference no: EM133207623

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