Question

Question 3 I. Colours Company 10% coupon bonds pay interest annually. When you bought one of these bonds, it had 20 years to maturity, and the appropriate discount rate was 7%. After one year, the discount rate on such bonds is 8%. You are considering to sell the bond.

a) Calculate the price at which you bought the bond.

b) Calculate the price at which you will sell the bond after one year.

c) Will you be happy with this investment? Explain. II. Allied Corp.'s bonds currently sell for $850. They have a 6.35% semiannual coupon rate and a 10-year maturity, but they can be called in 5 years at a call price of $1,060.50.

Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.

a) Calculate the nominal yield to maturity.

b) Calculate the nominal yield to call.

c) What rate of return should an investor expect to earn if he or she purchases these bonds? Explain your reasoning.

Mention the appropriate BA II Plus keys (where required).

Answer 1