Computation of YTM if the bonds are purchased at Issue price & Market price and analyzing the difference.
a. Consider the Allied Signal Corporation zero coupon money multiplier notes of 2008. The bonds were issued on July 1, 1990, for $100. Interest is paid every July 1 and the bond matures on July 1, 2008. Determine the yield to maturity if the bonds are purchased at the:
a. Issue price in 1990
b. Market price as of July 1, 2004, of $750
c. Explain why the returns calculated in (a) and (b) are different.
b. The following bond quotations are taken from the Wall Street Journal dated Friday, September 5, 2003:
|
Company
|
Coupon
|
Maturity
|
Last Price
|
Yield
|
|
International Paper (IP)
|
6.75
|
01- Sep- 2011
|
108.2
|
5.468
|
|
Sara Lee (SLE)
|
3.875
|
15-Jun-2013
|
89.7
|
5.235
|
|
Wells Fargo (WFC)
|
7.25
|
24-Aug-05
|
101.2
|
6.952
|
|
General Motors (GM)
|
7.125
|
15-Jul-13
|
109.65
|
2.191
|
|
Lincoln National (LNC)
|
6.2
|
15-Dec-11
|
105.9
|
5.307
|
a) Explain why the International Paper bond is selling at a premium but the Sara Lee is selling at a discount.
b) Why is the yield (yield to maturity) on the General Motors bond so much higher than the yield on the Sara Lee bond?
c) Why is the yield (yield to maturity) on the Wells Fargo Bank bond so much less than the yield on the Lincoln National Corp. bond?