Question

- A 10-year corporate bond has an annual coupon of 9% and a par value of $1,000. The bond is currently selling at a premium of 20% to par ($1,200). Which of the following statements is more likely to be CORRECT?

a. The bond’s yield to maturity is 9%.

b. The bond’s current yield is 9%.

c. IF the bond’s yield to maturity remains constant over the next year, an investor owning the bond will earn a capital GAIN of 11% next year.

d. IF the bond’s yield to maturity remains constant over the next year, an investor owning the bond will earn a capital LOSS next year.

e. NO investor should be willing to buy this bond as the price is too high.

Answer #1

please find below the solution ...

correct statement is : d. IF the bond’s yield to maturity remains constant over the next year, an investor owning the bond will earn a capital LOSS next year.

it will not be a) because bond is trading at premium therefore YTM will be lower than coupoun rate

It will not be b) because bond is trading at premium and current yield = 90/1200 and will not be 9%

it will not be c) because bond price next year will reduce to have 1000 at the maturity .. so it will not be capital gain

it will be d) because bond price will gradually fall and will give capital loss.

it will not be e) because its free market and price will match with supply.. there will not be situation of no trading..

A 10-year corporate bond has an annual coupon payment of 5.3%.
The bond is currently selling at par ($1,000). Which of the
following statement is not correct? Why?
The bond’s capital gain yield is 5.3%.
The bond’s yield to maturity is 5.3%.
The bond’s current yield is 5.3%.
If the bond’s yield to maturity remains constant, the bond’s
price will remain at par.

A 10-year bond with a 8% annual coupon has a yield to maturity
of 9%. Which of the following statements is CORRECT?
a. The bond’s current yield is greater than 9%.
b. If the yield to maturity remains constant, the bond’s price
one year from now will be higher than its current price.
c. The bond is selling above its par value.
d. If the yield to maturity remains constant, the bond’s price
one year from now will be lower...

A bond has a $1,000 par value, 7 years to maturity, and a 9%
annual coupon and sells for $1,095.
What is its yield to maturity (YTM)? Round your answer to two
decimal places.
Assume that the yield to maturity remains constant for the next
3 years. What will the price be 3 years from today? Do not round
intermediate calculations. Round your answer to the nearest
cent.

A 10-year, 12 % semiannual coupon bond with a par value of
$1,000 may be called in 4 years, at a call price of $1,060. The
bond sells for $1,300. (Assume the bond has just been
issued).
a. What is the bond’s yields to maturity? (15 points)
b. What is the bond’s current yield? (15 points)
c. What is the bond’s capital gain or loss yield in the first year
in percent? (15 points)
d. What is the bond’s yield...

A bond has a par value of $1,000, a time to maturity of 10
years, and a coupon rate of 8.60% with interest paid annually. If
the current market price is $860, what will be the approximate
capital gain of this bond over the next year if its yield to
maturity remains unchanged? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

A bond has a par value of $1,000, a time to maturity of 20
years, and a coupon rate of 7.10% with interest paid annually. If
the current market price is $710, what will be the approximate
capital gain of this bond over the next year if its yield to
maturity remains unchanged? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
Capital gain $_______

One year ago, an investor purchased a 10-year, $1,000
par value, 8% semiannual coupon bond with an 8% yield to maturity.
Now, one year later, interest rates remain unchanged at 8%. If the
investor sells the bond today (immediately after receiving the
second coupon payment, and with no transaction costs), he will
have:
A. a capital gain of $80.
B. a capital loss of $80.
C. no capital gain or loss.

Suppose an investor can purchase a 6-year 9% coupon bond with a
par value of $100 that pays interest semi-annually. The yield to
maturity for this bond is 10% on a bond-equivalent yield basis.
What is the coupon interest, capital gain/loss and reinvestment
income associated with this bond over its 6-year life? Assume that
the reinvestment rate is equal to the yield to maturity.

Suppose an investor can purchase a 6-year 9% coupon bond with a
par value of $100 that
pays interest semi-annually. The yield to maturity for this bond is
10% on a bond-equivalent yield basis.
What is the coupon interest, capital gain/loss and reinvestment
income associated with this bond over
its 6-year life? Assume that the reinvestment rate is equal to the
yield to maturity.

In Excel with formulas--
A 10-year, 12 % semiannual coupon bond with a par value of
$1,000 may be called in 7 years, at a call price of $1,100. The
bond sells for $1,500. (Assume the bond has just been
issued).
a. What is the bond’s yields to maturity?
b. What is the bond’s current yield?
c. What is the bond’s capital gain or loss yield in the first
year?
d. What is the bond’s yield to call?

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