Bond Evaluation Cliffard 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 a 7% annual coupon, matures in 12 years, and has a$1000 face value.
Bond B has a 9% annual coupon, matures in 12 years, and has a $1000 face value.
Bond C has an 11% annual coupon, matures in 12 years, and has a $1000 face value.
Each bond has a yield maturity of 9%.
A) Before calculating the prices of the bonds, indicate wether each bond is trading at a premium, at a discount, or at par.
B) Calculate the price of each of the three bonds.
C) Calculate the current yield for each of the three bonds.
D) If the yield to maturity for each bond remains 9%, what will be the price of each bond 1 year from now? What is the expected captial gains yield for each bond? What is the expected total return for each bond?
E) Mr. Clark is considering another bond, Bond D. It has a 8% semiannual coupon and a $1000 face value (i.e., it pays 40$ coupon every 6 months). Bond D is schedualed to mature in 9 years and has a price of $1150. It is also callable in 5 years with a call price of $1040.
1. What is the bonds nominal yield to maturity?
2. What is the bonds nomianl yield to call?
3. If Mr. Clark were to purchase this bond, would he be more liely to recieve the yield to maturity or yield to call? explain you answer.
F) Explain briefly the difference between price risk and reinvestment risk. which of the following bonds has the most price risk? Which has the most reinvestment risk?
A 1-year bond with a 9% annual coupon
A 5-year bond with a 9% annual coupon
A 5-year bond with zero coupon
A 10-year bond with a 9% annual coupon
A 10-year bond with a zero coupon
G) Calculate the price of each bond (A,B, and C) at the end of each year until maturity, assuming interest rates remain constant. create a graph showing the time path of each bonds value,
1. what is the expected interest yeild for each bond in each year?
2. What is the expected capital gains yield for each bond in each year?
3. What is the total return for each bond in each year?