Bond Valuation

Jenna bought a bond that was issued by Sherlock Watson Industries (SWI) three years ago. The bond

has a $1,000 maturity value, a coupon rate equal to 9 percent, and it matures in 17 years. Interest is paid

every six months; the next interest payment is scheduled for six months from today.

A) If the yield on similar risk investments is 12 percent, what is the current market value (price) of the

bond?

B) Compute the capital gains yield, current yield, and total yield that Jenna will earn if she holds the

bond until it matures. Assume that the market rate does not change from now until maturity.

C) Suppose that Joan just bought a 15-year bond for $902.71. The bond has a coupon rate equal to 7

percent, and interest is paid semiannually. What is the bonds yield to maturity (YTM)? If Joan holds

the bond for the next three years and its YTM does not change during that period, what return will

she earn each year? What portion of the annual return represents capital gains and what portion

represents the current yield?

D) Suppose that James just bought the same bond that Joan bought, but he bought it two years later for

$1,034.55. If James plans to hold his bond for five years and its YTM does not change during that

period, what return will he earn each year? What portion of the annual return represents capital gains

and what portion represents the current yield?