CASE2: A 10-year 10 percent semiannual coupon bond, with a par value of $1,000, may be called in 4 years at a call price of $1,160. The bond sells for $1,200. (Assume that the bond has just been issued.) What is the bond's yield to maturity? What is the bond's current yield? What is the bond's capital gain or loss yield? What is the bond's yield to call? How would the price of the bond be affected by changing interest rates? (Hint: Conduct a sensitivity analysis of price to changes in the yield to maturity, which is also the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification but assume it anyway for purposes of this problem.)
CASE2: A 10-year 10 percent semiannual coupon bond, with a par value of $1,000, may be called in 4 years at a call price of $1,160. The bond sells for $1,200. (Assume that the bond has just been issued.) What is the bond's yield to maturity? What is the bond's current yield? What is the bond's capital gain or loss yield? What is the bond's yield to call? How would the price of the bond be affected by changing interest rates? (Hint: Conduct a sensitivity analysis of price to changes in the yield to maturity, which is also the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification but assume it anyway for purposes of this problem.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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CASE2: A 10-year 10 percent semiannual coupon bond, with a par value of $1,000, may be called in 4 years at a call price of $1,160. The bond sells for $1,200. (Assume that the bond has just been issued.)
- What is the bond's yield to maturity?
- What is the bond's current yield?
- What is the bond's
capital gain or loss yield? - What is the bond's yield to call?
- How would the price of the bond be affected by changing interest rates? (Hint: Conduct a sensitivity analysis of price to changes in the yield to maturity, which is also the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification but assume it anyway for purposes of this problem.)
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