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(c) Bond A is a two-year bond with a face value of $100 and 10% annual coupons. Bond B is a two-year bond with a
(c) Bond A is a two-year bond with a face value of $100 and 10% annual coupons. Bond B is a two-year bond with a face value of $100 and 5% annual coupons. Both bonds are redeemable at par. The current term structure is defined by = 0.05 +0.02t for t = 1,2. (i) Find the price and yield-to-maturity of of bond A. [4] (ii) Find the price and yield-to-maturity of of bond B. [4] (iii) Compare the yield-to-maturity for both bonds. Elaborate on your observations by taking into consideration the coupon rate and term structure. [2] (iv) Find the at-par yield rate for a two-year bond with face and redemption values as above. [2] (v) Explain why the at-par yield rate is useful for a bond issuer. [2]
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