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Consider two bonds A and B issued by the same company. Both have 20 years till maturity and face value of $1,000. Bond A is callable at $1,050 and issued at a deep discount with a coupon rate of 4%(paid annually) and a price of $580, yielding 8,4%. Bond B is also callable at $1,050 but currently sold at par value with a coupon rate of 8,75% (paid annually).
a) What is the yield to maturity of Bond B?
b) Would yield to maturity be the most relevant measure for Bond B? If not, what yield measure would be more relevant for Bond B?
c) If interest rates are expected to fall substantially in the next 3 years, which bond would be more preferable to hold? Why?
d) Assume that in 1 year after the bonds were issued, market yield drops to 7% and Bond B is called back. Calculate the 1-year holding period returns for both bonds.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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