Question

Sam Strother and Shawna Tibbs are vice presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. An important new client, the North-Western Municipal Alliance, has requested that Mutual of Seattle present an investment seminar to the mayors of the represented cities, and Strother and Tibbs, who will make the actual presentation, have asked you to help them by answering the following questions.

Answer 1

f. 1. Par Value =1000
Coupon =9%*1000 =90
Number of Years =10
PV or Price of Bond =887
YTM using Financial Calclator
N=10;PMT =90;PV=-887;FV=1000;CPT I/Y =10.9117% or 10.91%

If PV or Price of Bond =1134.20
YTM using Financial Calclator
N=10;PMT =90;PV=-1134.20;FV=1000;CPT I/Y =7.08%

YTM is greater than Coupon rate is discount bond and if YTM is less than coupon rate it is premium bond.

2) Total return of Discout Bond =YTM =10.91%
Current Yield =Annual Coupon/Price =90/887=10.1466%
Capital Gain Yield =YTM-Current Yield =10.9117%-10.1466% =0.77%