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Ahmadbaba has two outstanding bonds (Bond A and Bond B) with different specifications. Bond A is a 5-year annual coupon bond with a par value
Ahmadbaba has two outstanding bonds (Bond A and Bond B) with different specifications. Bond A is a 5-year annual coupon bond with a par value of $1000, currently trading at $1025. The yield to maturity of Bond A is determined by adding different components of risk premiums onto the real risk-free rate of 1%. The expected inflation rate in the next two years is 5% per annum, and it will be 4% per annum thereafter. The maturity risk premium, liquidity premium, and default risk premium of Bond A adds up to 2.5%. Bond B is a 5-year quarterly coupon bond with an annual coupon rate of 6% and a par value of $1000. (a) Calculate the yield to maturity of Bond A. (2 marks) (b) Calculate the nominal coupon rate of Bond A. (4 marks) (c) Calculate the fair price of Bond B. (4 marks)
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