3. Three years ago you purchased a bond for $850 with an original maturity of 10 years, a coupon rateof 8% (paid annually), and a $1,000 par value. Back then your required return was 10%. Now, 3years later you want to sell the bond, but rates have increased and you can sell it for only $817.45.a.What is your holding period return (realized yield) over this 3-yr period? A timeline might help.b. Calculate the price of the bond 8 years after it was originally issued assuming the required returnon the bond at T-8 is 11%. HINT: Draw a timeline.

Price of bond is the present value of coupon payments plus present value of the par value of the…

Answered: hree years ago of 8% (paid ann years…

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter14: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 6DTM

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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?
What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)

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hree years ago of 8% (paid ann years later you w 1. What is your Calculate the on the bond a