Bond A is a $1,000, 6% quarterly coupon bond with 5 years to maturity. (a) If you bought Bond A today at a yield (APR) of 8%, what is your purchase price? Is this a premium or discount bond? Why? (b) One year later, Bond A's YTM (APR) has gone down to 6% and you sell it immediately after receiving the coupon. (i) What is the current yield? (ii) What is the capital gains yield?
Question 3 (Bond and Equity Valuation)
Bond A is a $1,000, 6% quarterly coupon bond with 5 years to maturity.
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(a) If you bought Bond A today at a yield (APR) of 8%, what is your purchase price? Is this a premium or discount bond? Why?
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(b) One year later, Bond A's YTM (APR) has gone down to 6% and you sell it immediately after receiving the coupon.
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(i) What is the current yield?
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(ii) What is the
capital gains yield? -
(iii) What is the one-year total
rate of return (in APR) if the coupons are reinvested at 2% per quarter during the holding period? -
(iv) Can Bond A’s one-year total rate of return be determined correctly by simply adding up the current yield and the capital gains yield? Explain your answer without calculations.
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