Bond Prices and Returns
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One bond has a coupon rate of 8 percent, another a coupon rate of 12 percent. Both bonds have 10-year maturities and sell at a yield to maturity of 10 percent.
If their yields to maturity next year are still 10 percent, what is the rate of return on each bond? (Show your work proving your answers).
Does the higher coupon bond give a higher rate of return? Why or why not?
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Cash received from semi-annual bond payments:
8% x $1000 per bond = $80
12% x $1000 per bond = $120
Call these amounts the coupon amounts or coupon rates
Calculation of yield to maturity percentage and selling price of bonds:
$80 / 10% = $800
$120 / 10% = $1200
Unlike stocks, bond prices change when the yield to maturity changes. The coupon rate is fixed over the life of the bond. The only way to have ...
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