Question

You currently own a 25-year maturity Government of Canada bond with a face value of $1000 that was issued Oct 15, 2015 (i.e. 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.

b) 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?

c) 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?

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?

e) 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?

Answer 1