1) Sam Goldsmiths broker has shown him 2 bonds. Each has maturity of five years, a par value of= $1000, and yield to maturity of= 12%. Bond A had coupon interest rate of= 6% paid annually. Bond B has coupon interest rate of= 14% paid annually.
a) Compute selling price for each of bonds.
b) Sam has= $20000 to invest. Judging on basis of price of bonds, how many of either one could Sam purchase if he were to select it over other? (Sam can’t really buy a fraction of the bond, but for purposes of this problem, pretend he can)
c) Compute yearly interest income of every bond on basis of its coupon rate and number of bonds which Sam could buy with his= $20000.
d) Suppose that Sam will reinvest interest payments as they are paid (at the end of each year) and that his rate of return in reinvestment is only= 10%. For each bond, compute the value of principle payment plus value of Sam’s reinvestment account at end of five years.
e) Why are the 2 values computed in part d different? If Sam worried that he would earn less than 12% yield to maturity on reinvested interest payments, which of these two bonds would be a better choice?