Solve both a) Suppose we have a 5-year investment horizon and we consider a 10-year 12%coupon bond with face value of $1,000. The yield to maturity of the 10-year bondright now is 10%. The future required yield on the bond 5 years from today is 9%.The bond makes semi-annual coupon payments. Our reinvestment rate for the next5 years is assumed to be 9%. What is the total return over the investment horizon?b) Same information as above, except that the reinvestment rate is assumed to be 6%in the first two years, 12% in the subsequent 3 years, and the future required yieldon the bond at t = 5 is assumed to be 12%. Investment horizon is still 5 years. What is%3Dthe horizon return then?6.

The question is based on valuation of bond , the valuation of bond is calculated as present value of…

Answered: a) Suppose we have a 5-year investment…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 4P

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Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). What is the yield to maturity? What is the yield to call if they are called in 5 years? Which yield might investors expect to earn on these bonds, and why? The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?
Current Yield for Annual Payments Heath Food Corporations bonds have 7 years remaining to maturity. The bonds have a face value of 1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their current yield?

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