On January 2, 2007, a Sunny Communications $1,000 face value, six-year bond sold for $889. Investors who

Question:

On January 2, 2007, a Sunny Communications $1,000 face value, six-year bond sold for $889. Investors who bought this particular bond will be paid interest equal to $40 every six months. Market interest rates did not change until December 31, 2007, when they decreased significantly. On January 2, 2008, the price of the bond was $1,042.

a. What was the bond’s yield to maturity on January 2, 2007?
b. What was the bond’s yield to maturity on January 2, 2008?
c. What return did investors who bought the bond on January 2, 2007 earn if they sold the bond one year later? What were the capital gains yield and the current yield on the bond in 2007?

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...