David Palmer identified the following bonds for investment: Bond A: A $1 million par, 10% annual coupon bond, which will mature on July 1, 2025. 2) 1) Bond B: A $1 million par, 14% semi-annual coupon bond (interest will be paid on January 1 and July 1 each year), which will mature on July 1, 2031. Bond C: A S1 million par, 10% quarterly coupon bond (interest will be paid on January 1, April 1, July 1, and October 1 each year), which will mature on July 1, 2026. 3) The three bonds were issued on July 1, 2011. (a) If Bond B is issued at face value and both Bond B and Bond A are having the same yield to maturity (EAR) at issuance, calculate the market price of Bond A on July 1, 2011. [Note: Full mark would only be given to correct answer of which the values of those variables not provided in the question directly are derived.] (b) David Palmer purchased Bond C on January 1, 2014 when Bond C was priced to have a yield to maturity (EAR) of 10.3812891%. David subsequently sold Bond C on January 1, 2016 when it was priced to have a yield to maturity (EAR) of 12.550881%. Assume all interests received were reinvested to earn a rate of return of 3% per quarter (in another investment account). Calculate: i) the current yield, ii) the 2-year capital gains yield and iii) the 2-year total rate of return on investment for David. [Note that this question is NOT asking for average yearly (total) return. Hint: think of total accumulation as FV (Annuity) of coupons and selling price.]
David Palmer identified the following bonds for investment: Bond A: A $1 million par, 10% annual coupon bond, which will mature on July 1, 2025. 2) 1) Bond B: A $1 million par, 14% semi-annual coupon bond (interest will be paid on January 1 and July 1 each year), which will mature on July 1, 2031. Bond C: A S1 million par, 10% quarterly coupon bond (interest will be paid on January 1, April 1, July 1, and October 1 each year), which will mature on July 1, 2026. 3) The three bonds were issued on July 1, 2011. (a) If Bond B is issued at face value and both Bond B and Bond A are having the same yield to maturity (EAR) at issuance, calculate the market price of Bond A on July 1, 2011. [Note: Full mark would only be given to correct answer of which the values of those variables not provided in the question directly are derived.] (b) David Palmer purchased Bond C on January 1, 2014 when Bond C was priced to have a yield to maturity (EAR) of 10.3812891%. David subsequently sold Bond C on January 1, 2016 when it was priced to have a yield to maturity (EAR) of 12.550881%. Assume all interests received were reinvested to earn a rate of return of 3% per quarter (in another investment account). Calculate: i) the current yield, ii) the 2-year capital gains yield and iii) the 2-year total rate of return on investment for David. [Note that this question is NOT asking for average yearly (total) return. Hint: think of total accumulation as FV (Annuity) of coupons and selling price.]
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 3P
Related questions
Question
![David Palmer identified the following bonds for investment:
Bond A: A $1 million par, 10% annual coupon bond, which will mature on July 1, 2025.
2)
1)
Bond B: A $1 million par, 14% semi-annual coupon bond (interest will be paid on January 1
and July 1 each year), which will mature on July 1, 2031.
Bond C: A S1 million par, 10% quarterly coupon bond (interest will be paid on January 1, April
1, July 1, and October 1 each year), which will mature on July 1, 2026.
3)
The three bonds were issued on July 1, 2011.
(a) If Bond B is issued at face value and both Bond B and Bond A are having the same yield to
maturity (EAR) at issuance, calculate the market price of Bond A on July 1, 2011.
[Note: Full mark would only be given to correct answer of which the values of those variables
not provided in the question directly are derived.]
(b) David Palmer purchased Bond C on January 1, 2014 when Bond C was priced to have a yield
to maturity (EAR) of 10.3812891%. David subsequently sold Bond C on January 1, 2016 when
it was priced to have a yield to maturity (EAR) of 12.550881%. Assume all interests received
were reinvested to earn a rate of return of 3% per quarter (in another investment account).
Calculate:
i) the current yield,
ii) the 2-year capital gains yield and
iii) the 2-year total rate of return on investment for David. [Note that this question is NOT
asking for average yearly (total) return. Hint: think of total accumulation as FV (Annuity)
of coupons and selling price.]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe0b947e7-463b-466c-a252-320f31254852%2Fb0338224-e7f5-49b5-bb22-ac01f7df679d%2Flore2jg_processed.png&w=3840&q=75)
Transcribed Image Text:David Palmer identified the following bonds for investment:
Bond A: A $1 million par, 10% annual coupon bond, which will mature on July 1, 2025.
2)
1)
Bond B: A $1 million par, 14% semi-annual coupon bond (interest will be paid on January 1
and July 1 each year), which will mature on July 1, 2031.
Bond C: A S1 million par, 10% quarterly coupon bond (interest will be paid on January 1, April
1, July 1, and October 1 each year), which will mature on July 1, 2026.
3)
The three bonds were issued on July 1, 2011.
(a) If Bond B is issued at face value and both Bond B and Bond A are having the same yield to
maturity (EAR) at issuance, calculate the market price of Bond A on July 1, 2011.
[Note: Full mark would only be given to correct answer of which the values of those variables
not provided in the question directly are derived.]
(b) David Palmer purchased Bond C on January 1, 2014 when Bond C was priced to have a yield
to maturity (EAR) of 10.3812891%. David subsequently sold Bond C on January 1, 2016 when
it was priced to have a yield to maturity (EAR) of 12.550881%. Assume all interests received
were reinvested to earn a rate of return of 3% per quarter (in another investment account).
Calculate:
i) the current yield,
ii) the 2-year capital gains yield and
iii) the 2-year total rate of return on investment for David. [Note that this question is NOT
asking for average yearly (total) return. Hint: think of total accumulation as FV (Annuity)
of coupons and selling price.]
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