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Today, a 20-year maturity bond with par value $1,000 makes annual coupon payments at a coupon rate of 8%. Its price is $950.

(a) Find the current yield and the yield to maturity (YTM) of this bond. Provide intuition for why the current yield and the YTM are not equal.

(b) If the YTM on this bond is the same next year as it is today (i.e., the value you found in (a)), what will the price of the bond be next year? Explain why the price of the bond next year will be higher, lower, or the same value as it is today.

(c) Assuming again that next year the YTM on the bond is the same as today, what is the rate of return earned by an investor who buys the bond today for $950 and sells it one year later?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92847891

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