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Three bonds for investment-what is current yield of bond

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Reference no: EM131923863

Peter is analyzing the following three bonds for investment:

Bond A

A 15 - year, $1,000, 5% semi - annual coupon bond issued by Company A

Bond B

A 1 0 - year, $1,000, 6% semi - annual coupon bond issued by Company B

Bond C

A 15 - year, $1,000, zero coupon bond issued by Company C

(a) If Bond C ( a zero coupon bond) is currently trading at $670 , what is YTM of Bond C ? Assume annual compounding.

(b) If Bond A is currently trading at par , what is the market price of Bond B if it has the same YTM as Bond A?

(c) i) What is the current yield of Bond A?

ii) Suppose Bond A’s YTM drops by 1% one year later. What is the capital gains yield of Bond A at that time?

(d) If Peter expects the interest rate to drop in the coming year, which bond (Bond A, Bond B or Bond C) would Peter choose to buy today? Explain briefly.

Reference no: EM131923863

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