7. Consider a bond paying a coupon rate of 10% per year semiannually when the market interest rate is only 4% per half year. The bond has three year until maturity.
(a) Find the bond's price today and six months from now after the next coupon is paid.
(b) What is the total (six month) rate of return on the bond?

8. Assume you have one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays $1000 at maturity. The second has an 8% coupon rate and pays the $80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year.
(a) If all three bonds are now priced to yield 8% to maturity. What are their prices?
(b) If you expect their yield to maturity to be 8% at the beginning of next year, what will their prices be then? What is your before-tax holding period return on each bond? If your tax bracket is 30% on ordinary income and 20% on capital gains income, what will your after-tax rate of return be on each?
(c) Recalculate your answer to (b) under the assumption that you expect the yields to maturity on each bond to be 7% at the beginning of next year.

Solution Summary

The expert finds the bond's price today and six months from now after the next coupon paid. The price to yield maturity is examined.

... if all cash flows are reinvested at the same rate of interest. ... calculates Bond Yields ( current yield, yield to maturity), Bond returns and Price of bonds. ...

... a) If your require rate of return is 11% for bond... e) If the market rates increase substantially, do you ... that shows the relationship bw the bonds price and your ...

... Required rate of return = risk free rate + beta(market risk premium) = 4.25 ... of a detailed explanation to compute the bond market price, yield to maturity...

... b. If the current market price is $1,104? c. Would you be willing to buy one of these bonds for $829 if you required a 12 percent rate of return on the ...

...maturity, 90 days. Check the attached sheet. The solution answers questions related to Bond price changes; holding period yield; bank discount rate of return, ...

...rate as capital gains is negative (price falls as ... has yield to maturity= current yield= coupon rate as there ... LOWER capital gain relative to a bond selling at ...

... What is yield to maturity of bonds? ... Required rate of return is 15.7%. At what price can stock be sold immediately after receiving the dividend? ...