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Bond A is a $1,000,6% quarterly coupon bond with 5 years to maturity. (a) If you bought Bond A today at a yield of 8%
Bond A is a $1,000,6% quarterly coupon bond with 5 years to maturity. (a) If you bought Bond A today at a yield of 8% compounded quarterly, what is your purchase price? Is this a premium bond? (4 marks) (b) One year later, Bond A's YTM has gone down to 6% compounded quarterly and you sell it immediately after receiving the coupon. i) What is the current yield? (2 marks) ii) What is the capital gains yield? (4 marks) F \# iii) In computing the 1-year holding period yield (HPY) for this bond investment, you figured that the correct answer could not be found by simply adding up the current yield and the 1-year capital gains yield because the current yield, by definition, would fail to consider the reinvestment of the quarterly coupons received during the year ( 4 quarters in total). (1) If the interest rate remains unchanged at 8% compounded quarterly during the 1year period, calculate the total amount of coupon income (coupon payments and reinvestment of coupon payments) at the end of the 1-year holding period,. [Hint: Use the FVA formula.] (2 marks) (2) Based on the results from part (biii (1)) and part (bii), calculate the 1-year holding period yield ( HPY1-year ). (2 marks)
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