Q1) Ten years ago, A Pane in Glass, Inc. (major glass manufacturer) raised money by issuing $100 million of $1,000 face value bonds with 14% coupon paid annually and maturity of 25 years. Bonds sold at their face value of $1,000 per bond. On recommendation of your friend, alumnus of Fordham AEMBA, you purchased one of the bonds. Today, yield in market on this bond has dropped to 12%.
a. Determine annual payment did you, as original bondholder, receive?
b. What was yield-to-maturity (YTM) of bonds at their date of issue?
c. At what price is each bond selling today?
d. Why has price changed way it has?
e. Separate YTM into current yield and capital gains yield you will receive over next year if market rate of 12% does not change.
f. If you were to sell bond today, what would be your holding-period yield?
g. You decide to keep bond for one more year and then sell it. How much further would yield on this bond have to drop for you to earn holding period yield of 18%?