Chapter 10, Problem 1P

You are a fixed income analyst with an active investment in two bonds. X and Y. Bond X has a coupon rate of 9% and Bond Y has a 10% annual coupon. Both bonds have 5 years to maturity. The yield to maturity for both bonds is now 10%. If the required return rises by 14%, by what percentage will the price of the bond X change? Please provide complete details of the calculations (formula/steps) of the above question

2) As an investor, you are considering an investment in the bonds of the Soccer Company. The bonds, which pay interest semiannually, will mature in ten years, and have a coupon rate of 6.5% on a face value of $1,000. a) Assume your required return is 8% (market rate) for the bonds in this risk class, what is the highest price you would be willing to pay for the bond? (Use the PV function) b) What is the current yield of these bonds? c) If you bought the bond at the above calculated price and hold the bonds for one year, what total rate of return will you earn (assuming the market rate does not change)? Hint: You need to calculate the bond price one year ahead (note: in one year 9 years are left to maturity) and then compute the total return based on the capital gains/loss yield (in %) and the current yield (in %) from b). d) What is the yield to maturity on these bonds if you purchase them at the price calculated under a)? (Use the RATE function) e) If the bonds can be called in three…

Consider a 25-year coupon bond which has a face value of $500 and a 5% coupon rate. Its current price is $500. The interest on this bond is expected to go up from 5% to 10% next year. a) Calculate the current yield of this 25-year coupon bond. b) Using the coupon bond pricing formula, calculate the expected price at which this bond will be sold next year. c) Calculate the expected rate of return if you buy the bond today and sell it next year. d) Are you going to invest on this bond if your investment horizon is just one year? Explain why or why not.