Bond A is a 12-year 7% annual coupon bond. Bond B is a 12-year 9% annual...
Bond A is a 12-year 7% annual coupon bond. Bond B is a 12-year 9% annual coupon bond. Bond C is a 12-year 11% annual coupon bond. Each of these three bonds has a yield to maturity (YTM) of 9%. Assume the market rate of interest does not change over time.
- Is the capital gains yield (CGY) earned on Bond A greater than the CGY on Bond C? Explain.
- Is the interest yield (IY) on Bond A in year 2 greater than the IY on Bond C in year 2? Explain.
Homework Answers
- Is the capital gains yield (CGY) earned on Bond A greater than the CGY on Bond C? Explain.
Yes, Capital gains yield (CGY) earned on Bond A greater than the CGY on Bond C because Bond A is a discount bond (coupon rate is less than its yield to maturity); therefore price of bond A will increase with date of maturity approaching. While Bond C is a Premium bond (coupon rate is more than its yield to maturity); therefore price of bond C will decrease with date of maturity approaching.
Capital gains yield (CGY) = (P1 –P0) /P0 *100
- Is the interest yield (IY) on Bond A in year 2 greater than the IY on Bond C in year 2? Explain.
No, the interest yield (IY) on Bond A in year 2 is lower than the IY on Bond C in year 2 because the coupon rate of Bond A is lower than Bond C therefore interest paid on Bond A is lower than Bond C. Therefore the interest yield (IY) on Bond A in year 2 is lower than the IY on Bond C in year 2.
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Bond A is a 12-year 7% annual coupon bond. Bond B is a 12-year
9% annual...
Bond A is a 12-year 7% annual coupon bond. Bond B is a 12-year 9% annual...
Bond A is a 12-year 7% annual coupon bond. Bond B is a 12-year 9% annual coupon bond. Bond C is a 12-year 11% annual coupon bond. Each of these three bonds has a yield to maturity (YTM) of 9%. Assume the market rate of interest does not change over time. Specify the bond that sells at premium, sells at discount, and sells at par. What is value of each bond at this moment (t=0)? Specify the inputs for your...
2. Bond yields and prices over time A bond investor is analyzing the following annual coupon...
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A bond investor is analyzing the following annual coupon bonds: Annual Coupon Rate 6% Issuing Company...
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2. Bond yields and prices over time A bond investor is analyzing the following annual coupon bonds: Annual Coupon Rate Issuing Company Johnson Enterprises Smith Incorporated Irwin Metalworks 12% 995 Each bond has 10 years until maturity and has the same risk. Their yield to maturity (YTM) is 9%. Interest rates are assumed to remain constant over the next 10 years. Label the curves on the following graph to indicate the path that each bond's price, or value, is expected...
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