Question
A General Power bond carries a coupon rate of 8%, has 3 years until maturity, and sells at a yield to maturity of 7%. (Assume
A General Power bond carries a coupon rate of 8%, has 3 years until maturity, and sells at a yield to maturity of 7%. (Assume face value of bond is $1000 and annual coupon payments)
a. At what price does the bond sell?
b. Suppose that after one year and receiving one coupon payment, you decide to sell the bond. The current interest rate is 5%. At what price will the bond be sold for? What will be your rate of return if you sell the bond at that price, assuming you bought the bond at the price in part a?
c. Recalculate the price of the bond in part a, assuming that it is a zero-coupon bond.
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