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    Bond Yields

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    1. Consider the Leverage Unlimited, Inc., zero coupon bonds of 2008. The bonds were issued in 1990 for $100. Determine the yield to maturity (to the nearest 1/10 of 1 percent) if the bonds are purchased at the...

    a. Issue price in 1990. (Note: To avoid a fractional year holding period, assume that the issue and maturity dates are at the midpoint: July 1of the respective years.)
    b. Market price as of July 1, 2004, of $750.
    c. Explain why the returns calculated in Parts a and b are different.

    2. American Telephone & Telegraph has issued 81/8 percent debentures that will mature on July 15, 2024. Assume that interest is paid and compounded annually. If an investor purchased a $1,000 denomination bond for $1,025 on July 15, 2004, determine the bond's yield to maturity. Explain why an investor would be willing to pay $1,025 for a bond that is going to be worth only $1,000 at maturity.

    3. Consider again the American Telephone & Telegraph 8 1/8 percent debentures that mature on July 15, 2024 (see problem 6). Determine the yield to call if the bonds are called on July 15, 2010 at $1,016.55

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    Solution Preview

    ** Please see the attached EXCEL file for complete details **

    --------------
    1. Consider the Leverage Unlimited, Inc., zero coupon bonds of 2008. The bonds were issued in 1990 for $100. Determine the yield to maturity (to the nearest 1/10 of 1 percent) if the bonds are purchased at the
    a. Issue price in 1990. (Note: To avoid a fractional year holding period, assume that the issue and maturity dates are at the midpoint "July 1" of the respective years

    For a zero coupon bond
    Price x (1+Yield)^ number of years = Face value (redemption value)
    Therefore, Yield = (face value / price) ^(1/number of years) - 1
    (^ means raised to the power of)
    Face value= $1,000
    Issue Price= $100
    Number of years to maturity= 18 (2008-1990)
    Therefore yield to maturity= 13.6% =(1000 / 100 )^(1/18)-1
    Answer: Yield to maturity= 13.6%

    b. Market price as of July 1, 2004, of $750.

    Face value= $1,000
    Issue Price= $750
    Number of years to ...

    Solution Summary

    Bond yield calculations- yield to maturity, yield to call etc.

    $2.19

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