a) One bond has a coupon rate of 8 percent, another a coupon rate of 12 percent. Both bonds pay coupons annually, have 10-year maturities, and sell at a yield to maturity of 10 percent. If their yields to maturity next year are still 10 percent, what is the rate of return on each bond? Does the higher coupon bond give a higher rate of return? Assume coupons are not reinvested.
b) Small Industries bonds sell for $896.09. The bond life is 7 years, and the yield to maturity is 8.5 percent. What must be the coupon rate on the bonds? Coupons are paid semi-annually.