Question
7. The yield to maturity on a 1.5% annual coupon bond with a term to maturity of 30 years and a face value of $100
7. The yield to maturity on a 1.5% annual coupon bond with a term to maturity of 30 years and a face value of $100 is 6% per year.
(a): Work out the price of the bond at t=0.
(b): Work out the amount of money you will have if you assume that you will be earning a return of 6% per year over the term to maturity of the bond.
(c): Work out the profit you will have made if you assume that you will be earning a return of 6% per year over the term to maturity of the bond.
(d): What is the sum of the coupons that you received? What percentage of the profit that you worked out in part (c) does this sum of coupons form?
(e): What is the capital gain that you realized on the maturity of the bond? What percentage of the profit that you worked out in part (c) does this capital gain form?
(f): What is the reinvestment income that you assume you will have earned over the life of the bond? What percentage of the profit that you worked out in part (c) does this reinvestment income form?
(g): What would have been your answers to the questions above if you had been given that the face value of the bond was $1000? You need not do the actual calculations; you only need to indicate by what factor the dollar amount of your answers will differ if you change the face value from $100 to $1000.
(h): How would your answers about percentages in parts (d) to (f) have changed when you changed the face value from $100 to $1000?
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