I BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year. a. What will the value of each bond be if the going interest rate is 5%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L. b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? BOND YIELDS Last year Clark Company issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for $1,100. a. b. What is the current yield? Is this yield affected by whether the bond is likely to be called? (Hint: Refer to Footnote 8 for the definition of the current yield and to Table 7-1.) C. What are the bond's nominal yield to maturity and its nominal yield to call? Would an investor be more likely to earn the YTM or the YTC? What is the expected capital gains (or loss) yield for the coming year? Is this yield dependent on whether the bond is expected to be called?
I BOND VALUATION An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year. a. What will the value of each bond be if the going interest rate is 5%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on Bond L. b. Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change? BOND YIELDS Last year Clark Company issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and it sells for $1,100. a. b. What is the current yield? Is this yield affected by whether the bond is likely to be called? (Hint: Refer to Footnote 8 for the definition of the current yield and to Table 7-1.) C. What are the bond's nominal yield to maturity and its nominal yield to call? Would an investor be more likely to earn the YTM or the YTC? What is the expected capital gains (or loss) yield for the coming year? Is this yield dependent on whether the bond is expected to be called?
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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Transcribed Image Text:7-5
7-11
BOND VALUATION An investor has two bonds in his portfolio that have a face value of
$1,000 and pay a 10% annual coupon. Bond L matures in 15 years, while Bond S matures in
1 year.
a.
What will the value of each bond be if the going interest rate is 5%, 8%, and 12%?
Assume that only one more interest payment is to be made on Bond S at its maturity
and that 15 more payments are to be made on Bond L.
b. Why does the longer-term bond's price vary more than the price of the shorter-term
bond when interest rates change?
BOND YIELDS Last year Clark Company issued a 10-year, 12% semiannual coupon bond
at its par value of $1,000. Currently, the bond can be called in 4 years at a price of $1,060 and
it sells for $1,100.
a. What are the bond's nominal yield to maturity and its nominal yield to call? Would an
investor be more likely to earn the YTM or the YTC?
b.
What is the current yield? Is this yield affected by whether the bond is likely to be called?
(Hint: Refer to Footnote 8 for the definition of the current yield and to Table 7-1.)
C.
What is the expected capital gains (or loss) yield for the coming year? Is this yield
dependent on whether the bond is expected to be called?
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