Start with the partial model in the file IFM9 Ch04 P16 Build a Model.xls from the ThomsonNOW Web site. Rework given Problem. After completing parts a through d, answer the following related questions.

e. How would the price of the bond be affected by changing interest rates? (Hint: Conduct a sensitivity analysis of price to changes in the yield to maturity, which is also the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)

f. Now assume that the date is October 25, 2006. Assume further that our 12 percent, 10-year bond was issued on July 1, 2006, is callable on July 1, 2010, at $1,060, will mature on June 30, 2016, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to find (1) the bond's yield to maturity and (2) its yield to call.

Problem:
A 10-year, 12 percent semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)

a. What is the bond's yield to maturity?

b. What is the bond's current yield?

c. What is the bond's capital gain or loss yield?

d. What is the bond's yield to call?