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Bond Valuation: You currently own a 25-year maturity Government of Canada bond with a face value of $1000 that was issued Oct 15, 2015 (ie. 5 years ago) with a 6% coupon paid semi-annually. The current price of the bond is $1075. a) What is the current YTM of this Government of Canada bond? Assume semi-annual compounding You also own a Corporate bond that will mature in 20 years. It also pays a semi-annual coupon of 6% and has a face value $1000. Its YTM is 8% compounding semi-annually. What is the current price of the bond? Is the YTM of the corporate bond higher than the YTM of the comparable Government of Canada bond? What factors may be driving this difference? b) c) d) You are considering buying another corporate bond with similar characteristics except for the added call provision in bond indenture. What possible advantages or disadvantages would this new bond offer to you? Would you require a higher or lower YTM in comparison to the corporate bond you already own? Yield curves are used to predict future economic activity. What does a normal (or up- sloped) yield curve suggest? What does an inverted yield curve suggest? (2 marks) e)Process and detailed explanations required

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Yield to maturity is the total return expected on the bond if the bond is held until it maturity. Period Face value coupon rate 40 3,00% 2.69% 1,075.00 Price Current YTM 9 b) 10 Period Face value coupon rate 40 12 13 3.00% 4.00% 802.07 Price 15 C) 16 17 18 19 d) 20 21 Yes the YTM of corporate bond is higher than government bond The corporate bond has comparatively more default risk then government bonds. Also the income from government bond is tax free generally whereas the corporate bonds are not tax free A callable bond can be redeemed by the issuer prior to its maturity in case the interest rate falls Advantages Higher coupon rate Disadvantages Reinvestment risk 25 Higher YTM is required in comparision to bond already owned as the investor take reinvestment riskeld to maturity is the total return expected on the bond if the bond is held until it maturity. Period Face value coupon rate -202 0.0269151229216149 Price Current YTM 05 2 Period Face value coupon rate -20 2 1000 12 13 14 15 c) 16 17 --PV(C 12,C9,C10-c11)-c Yes the YTM of corporate bond is higher than government bond The corporate bond has comporatively more default risk then government bonds. Also the income from overnment bond is tax free enerally whereas the corporate bonds are not tax free 19 d 20 21 A callable bond can be redeemed by the issuer prior to its maturity in case the interest rate falls Higher coupon rate 23 Reinvestment risk 25 Higher YTM is required in comparision to bond already owned as the investor take reinvestment risk

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