Question

Five years ago, Winter Tire Corp. issued a bond with a 12% coupon rate, semi-annual coupon payments, $1,000 face value, and 15-years until maturity.

a) You bought this bond two years ago (right after the coupon payment) when the yield-to-maturity was 12%. How much did you pay for the bond?

b) If the yield-to-maturity is 15% now, what is the value of the bond today (next coupon payment is in 6 months from today)?

c) If you sold the bond now (i.e., after having owned it for two years), what would be your capital gain/loss yield (expressed as an EAR)? Remember, the capital gain/loss yield is the return resulting from price changes of your investment.

d) Suppose two years from now (right after the coupon payment) the bond has a value of $1,200. What would be the yield-to-maturity of the bond in two years from now (APR, semi-annually compounded)? Use Excel (IRR function, Goal seek, Solver) or a financial calculator to solve this question.