Reference no: EM132644731
Use the information below to answer question a to i Par value 1000Coupon rate 10% of par, paid annually
Maturity = 5 years
YTM = 8% at time 0
a. What is the price of this bond at time 0?
b. What is the bond price at time 1 if YTM remains constant at 8%
c. Compute capital gain yield (i.e., bond's percentage price change) and current yield (i.e., coupon/bond price). Show that capital gain yield + Current yield = YTM
d. Compute the price of the bond in year 2, 3, 4, and 5. And plot the prices in each year against time
e. If at time 1, YTM increases to 12%, compute bond price at time 1
f. Based on "e", compute one year holding period return based on the price at time 0, coupon received, and bond price at time 1 when YTM is 12%.
g. Based on "f", If YTM remains 12% for the rest of the life of this bond, compute bond price at time 2, 3, 4, and 5
h. Based on "g", compute one year holding period return between time 1 and time 2 (based on price at time 1, coupon at time 2, and price at time 2).
i. Explain why if you hold the bond from time 0 to maturity, IRR of your investment will be 8% regardless of how YTM moves between year 0 and year 5.