lifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds: Bond A has a 9% annual coupon, matures in 12 years, and has a $1,000 face value. Bond B has a 10% annual coupon, matures in 12 years, and has a $1,000 face value. Bond C has an 8% annual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a yield to maturity of 9%.
lifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds: Bond A has a 9% annual coupon, matures in 12 years, and has a $1,000 face value. Bond B has a 10% annual coupon, matures in 12 years, and has a $1,000 face value. Bond C has an 8% annual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a yield to maturity of 9%.
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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Question
Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds:
-
Bond A has a 9% annual coupon, matures in 12 years, and has a $1,000 face value.
-
Bond B has a 10% annual coupon, matures in 12 years, and has a $1,000 face value.
-
Bond C has an 8% annual coupon, matures in 12 years, and has a $1,000 face value.
Each bond has a yield to maturity of 9%.
Transcribed Image Text:e. Mr. Clark is considering another bond, Bond D. It has a 7% semiannual coupon and a $1,000 face value (i.e., it pays a $35 coupon every 6 months).
Bond D is scheduled to mature in 9 years and has a price of $1,140. It is also callable in 7 years at a call price of $1,020.
1. What is the bond's nominal yield to maturity? Round your answer to two decimal places.
3. If Mr. Clark were to purchase this band, would he be more likely to receive the yield to maturity or yield to call? Explain your answer.
Because the YTM is
✓the YTC, Mr. Clark
✓expect the bond to be called. Consequently, he would earn
f. Explain briefly the difference between price risk and reinvestment risk.
This risk of a decline in bond values due to an increase in interest rates is called
interest rates is called
2. What is the bond's nominal yield to call? Round your answer to two decimal places.
Which of the following bonds has the most price risk? Which has the most reinvestment risk?
A 1-year bond with a 9% annual coupon
• A 5-year bond with a 9% annual coupon
A 5-year bond with a zero coupon
A
A
• A 10-year bond with a 9% annual coupon
A 10-year bond with a zero coupon
Years Remaining
Until Maturity
g. Calculate the price of each bond (A, B, and C) at the end of each year until maturity, assuming interest rates remain constant. Round your answers
to the nearest cent.
12
11
10
9
8
7
6
5
4
3
2
1
0
$
$
S
$
$
S
S
S
S
$
$
$
$
has the most price risk.
has the most reinvestment risk.
Bond A
$
$
$
$
$
$
$
$
$
$
$
$
$
Bond B
$
$
$
$
$
$
$
$
$
$
$
$
$
The risk of an income decline due to a drop in
Bond C
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