1 14 marks Consider the following four bonds that pay annual coupons and have a face value of $1,000: Calculate the price of each bond based on the current yield to maturity (YTM 1) Calculate the price of each bond based on a forecast change in Yield to maturity (YTM 2) Calculate the % change in price for all bonds if the Yield to maturity were to increase to YTM 2. Years to Bond Coupon YTM 1 Price YTM 2 Price % Chg A B maturity 1 5 10 20 0% 6% 10% 0% 5.00% 7.00% 9.00% 8.00% 6.00% 8.00% 10.00% 9.00% D 0.00% $0.00 2 2 lo 2 6 marks total b) 1 mark Which bond would an investor prefer to hold for 1 year if they were forecasting rates to decrease? Briefly explain why. 1 mark An investor with a 1 year time horizon purchases Bond A with a YTM of 5%. Six months later interest rates increase by 1%. The investor decides to hold the bond to maturity. What is the investor's total return on investment for the one year period? c) d) Assume an investor purchases Bond B today at a YTM = 7% and sells it right after the first coupon is paid a year from now at a YTM = 8%. What is the profit or loss on this bond trade? 3 marks total Profit/Loss $ Profit/Loss % 2 marks 1 mark e) As an investor in Corporate Bonds, what are the 2 main factors that you would be concerned about having a negtive impact on the value of your investment? 2 marks 1 14 marks Consider the following four bonds that pay annual coupons and have a face value of $1,000: Calculate the price of each bond based on the current yield to maturity (YTM 1) Calculate the price of each bond based on a forecast change in Yield to maturity (YTM 2) Calculate the % change in price for all bonds if the Yield to maturity were to increase to YTM 2. Years to Bond Coupon YTM 1 Price YTM 2 Price % Chg A B maturity 1 5 10 20 0% 6% 10% 0% 5.00% 7.00% 9.00% 8.00% 6.00% 8.00% 10.00% 9.00% D 0.00% $0.00 2 2 lo 2 6 marks total b) 1 mark Which bond would an investor prefer to hold for 1 year if they were forecasting rates to decrease? Briefly explain why. 1 mark An investor with a 1 year time horizon purchases Bond A with a YTM of 5%. Six months later interest rates increase by 1%. The investor decides to hold the bond to maturity. What is the investor's total return on investment for the one year period? c) d) Assume an investor purchases Bond B today at a YTM = 7% and sells it right after the first coupon is paid a year from now at a YTM = 8%. What is the profit or loss on this bond trade? 3 marks total Profit/Loss $ Profit/Loss % 2 marks 1 mark e) As an investor in Corporate Bonds, what are the 2 main factors that you would be concerned about having a negtive impact on the value of your investment? 2 marks