a If the bond currently sells for $1,045, what is the yield of maturity (YTM) on this bond? b If you are expecting that the interest rate will drop in the near future and you want to gain profit by speculating on a bond, will you buy or sell this bond? Why? P6-23 Bond Valuation and Yield to Maturity Mark Goldsmith's broker has shown him two bonds. Each has a maturity of 5 years, a par value of $1,000 and, a yield to maturity of 12%. Bond A has a coupon interest rate of 6% paid annually. Bond B has a coupon interest rate of 14% paid annually. at Calculate the selling price for each of the bonds. b Mark has $20,000 to invest. Judging on he basis of the price of the bonds, how many of either one could Mark purchase if he were to chose it over the other? (Mark cannot really purchase a fraction of a bond, but for purposes of this question. pretend that he can.) 0. Calculate the yearly interest income of each bond on the basis of its coupon rate and the number of bonds that Mark could buy with his $20,000. d Assume that Mark will reinvest the interest payments as they are paid (at the end of each year) and that his rate of return on the reinvestment is only 10%. For each bond, calculate the value of the principal payment plus the value of Mark's reinvestment account at the end of the 5 years. e Why are the two values calculated in part d different? If Mark were worried that he would earn less than the 12% yield to maturity on the reinvested interest payments, which of these two bonds would be a better choice? P6-25 Bond Valuation: Semi-annual Interest Calculate the value of each of the bonds shown in the following table, all of which pay interest semi-annually. Bon Par value Coupon interest Years of Required stated B 12 20 12 1,000 1'"? arm 1 9 I: 1 A