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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.
The bonds have a 9.40 percent coupon rate and pay interest annually. The current market rate of interest on the Fresh Water, Inc. bonds is 9.58 percent. What is the current market price of the bonds?
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You need to insure your home over the next 20 years. You can either pay beginning-of-year premiums with today's premium of $5,000 and future premiums growing at 4 percent per year, or prepay a lump sum of $67,500 for the entire 20 years of coverag..
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You don't expect any further shifts after that, however. Also assume that at any point in time (e.g., t = 1) there will always be a one-year zero-coupon bond for sale at the prevailing rate at that time.
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a five-year corporate bond paying an annual coupon of 8 is sold at a price reflecting a yield to maturity of 6. one
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