Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds: Bond A has an 8% annual coupon, matures in 12 years, and has a $1,000 face value. Bond B has an 11% annual coupon, matures in 12 years, and has a $1,000 face value. Bond C has a 14% annual coupon, matures in 12 years, and has a $1,000 face value. Each bond has a yield to maturity of 11%. The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Use a minus sign to enter negative values, if any. If an answer is zero, enter "0". A) Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, at a discount, or at par. Bond A is selling at because its coupon rate is the going interest rate. Bond B is selling at because its coupon rate is the going interest rate. Bond C is selling at because its coupon rate is the going interest rate. B) Calculate the price of each of the three bonds. Round your answers to the nearest cent. Price (Bond A): $ fill in the blank 8 Price (Bond B): $ fill in the blank 9 Price (Bond C): $ fill in the blank 10 C. Calculate the current yield for each of the three bonds. (Hint: The expected current yield is calculated as the annual interest divided by the price of the bond.) Round your answers to two decimal places. Current yield (Bond A): fill in the blank 11 % Current yield (Bond B): fill in the blank 12 % Current yield (Bond C): fill in the blank 13 % D) If the yield to maturity for each bond remains at 11%, what will be the price of each bond 1 year from now? Round your answers to the nearest cent. Price (Bond A): $ fill in the blank 14 Price (Bond B): $ fill in the blank 15 Price (Bond C): $ fill in the blank 16 What is the expected capital gains yield for each bond? What is the expected total return for each bond? Round your answers to two decimal places. Bond A Bond B Bond C Expected capital gains yield fill in the blank 17 % fill in the blank 18 % fill in the blank 19 % Expected total return fill in the blank 20 % fill in the blank 21 % fill in the blank 22 % E) Mr. Clark is considering another bond, Bond D. It has a 7% semiannual coupon and a $1,000 face value (i.e., it pays a $35 coupon every 6 months). Bond D is scheduled to mature in 8 years and has a price of $1,140. It is also callable in 6 years at a call price of $1,080. What is the bond's nominal yield to maturity? Round your answer to two decimal places. fill in the blank 23 % What is the bond's nominal yield to call? Round your answer to two decimal places. fill in the blank 24 % If Mr. Clark were to purchase this bond, would he be more likely to receive the yield to maturity or yield to call? Explain your answer. Because the YTM is the YTC, Mr. Clark expect the bond to be called. Consequently, he would earn
Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds:
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Bond A has an 8% annual coupon, matures in 12 years, and has a $1,000 face value.
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Bond B has an 11% annual coupon, matures in 12 years, and has a $1,000 face value.
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Bond C has a 14% annual coupon, matures in 12 years, and has a $1,000 face value.
Each bond has a yield to maturity of 11%.
The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Use a minus sign to enter negative values, if any. If an answer is zero, enter "0".
A)
Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, at a discount, or at par.
Bond A is selling at
because its coupon rate is
the going interest rate.
Bond B is selling at
because its coupon rate is
the going interest rate.
Bond C is selling at
because its coupon rate is
the going interest rate.
B)
Calculate the price of each of the three bonds. Round your answers to the nearest cent.
Price (Bond A): $ fill in the blank 8
Price (Bond B): $ fill in the blank 9
Price (Bond C): $ fill in the blank 10
C.
Calculate the current yield for each of the three bonds. (Hint: The expected current yield is calculated as the annual interest divided by the price of the bond.) Round your answers to two decimal places.
Current yield (Bond A): fill in the blank 11 %
Current yield (Bond B): fill in the blank 12 %
Current yield (Bond C): fill in the blank 13 %
D)
If the yield to maturity for each bond remains at 11%, what will be the price of each bond 1 year from now? Round your answers to the nearest cent.
Price (Bond A): $ fill in the blank 14
Price (Bond B): $ fill in the blank 15
Price (Bond C): $ fill in the blank 16
What is the expected
| Bond A | Bond B | Bond C | |
| Expected capital gains yield | fill in the blank 17 % | fill in the blank 18 % | fill in the blank 19 % |
| Expected total return | fill in the blank 20 % | fill in the blank 21 % | fill in the blank 22 % |
E)
Mr. Clark is considering another bond, Bond D. It has a 7% semiannual coupon and a $1,000 face value (i.e., it pays a $35 coupon every 6 months). Bond D is scheduled to mature in 8 years and has a price of $1,140. It is also callable in 6 years at a call price of $1,080.
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What is the bond's nominal yield to maturity? Round your answer to two decimal places.
fill in the blank 23 %
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What is the bond's nominal yield to call? Round your answer to two decimal places.
fill in the blank 24 %
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If Mr. Clark were to purchase this bond, would he be more likely to receive the yield to maturity or yield to call? Explain your answer.
Because the YTM is
the YTC, Mr. Clark
expect the bond to be called. Consequently, he would earn
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