Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds:

Bond A has a $10\%$ annual coupon, matures in $12$ years, and has a $$1,000$ face value.

Bond B has an $8\%$ annual coupon, matures in $12$ years, and has a $$1,000$ face value.

Bond C has a $12\%$ annual coupon, matures in $12$ years, and has a $$1,000$ face value.

Each bond has a yield to maturity of $10\%.$

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Use a minus sign to enter negative values, if any. If an answer is zero, enter $"0".$

Download spreadsheet Bond Valuation$-$f$852$aa$.$xlsx

Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, at a discount, or at par.

Bond A is selling at

par

because its coupon rate is

equal to

the going interest rate.

Bond B is selling at

a discount

because its coupon rate is

less than

the going interest rate.

Bond C is selling at

a premium

because its coupon rate is

greater than

the going interest rate.

Calculate the price of each of the three bonds. Round your answers to the nearest cent.

Price $($Bond A$)$: $ fill in the blank $8$

$1000$

Price $($Bond B$)$: $ fill in the blank $9$

$$863\mathrm{.}73$

Price $($Bond C$)$: $ fill in the blank $10$

$1136\mathrm{.}27$

Calculate the current yield for each of the three bonds. $($Hint: The expected current yield is calculated as the annual interest divided by the price of the bond.$)$ Round your answers to two decimal places.

Current yield $($Bond A$)$: fill in the blank $11$

$10$

$\%$

Current yield $($Bond B$)$: fill in the blank $12$

$9\mathrm{.}26$

$\%$

Current yield $($Bond C$)$: fill in the blank $13$

$10\mathrm{.}56$

$\%$

If the yield to maturity for each bond remains at $10\%,$ what will be the price of each bond $1$ year from now? Round your answers to the nearest cent.

Price $($Bond A$)$: $ fill in the blank $14$

$1000$

Price $($Bond B$)$: $ fill in the blank $15$

$870\mathrm{.}1$

Price $($Bond C$)$: $ fill in the blank $16$

$1129\mathrm{.}9$

What is the expected capital gains yield for each bond? What is the expected total return for each bond? Round your answers to two decimal places.

Bond A Bond B Bond C

Expected capital gains yield fill in the blank $17$

$0$

$\%$ fill in the blank $18$

$\mathrm{.}74$

$\%$ fill in the blank $19$

$-\mathrm{.}56$

$\%$

Expected total return fill in the blank $20$

$10$

$\%$ fill in the blank $21$

$10$

$\%$ fill in the blank $22$

$10$

$\%$

Mr$.$ Clark is considering another bond, Bond D$.$ It has an $8\%$ semiannual coupon and a $$1,000$ face value $($i$.$e$.,$ it pays a $$40$ coupon every $6$ months$).$ Bond D is scheduled to mature in $7$ years and has a price of $$1,210.$ It is also callable in $5$ years at a call price of $$1,090.$

What is the bond's nominal yield to maturity? Round your answer to two decimal places.

fill in the blank $23$

$4\mathrm{.}47$

$\%$

What is the bond's nominal yield to call? Round your answer to two decimal places.

fill in the blank $24$

$4\mathrm{.}83$

$\%$

If Mr$.$ Clark were to purchase this bond, would he be more likely to receive the yield to maturity or yield to call? Explain your answer.

Because the YTM is

less than

the YTC$,$ Mr$.$ Clark

should not

expect the bond to be called. Consequently, he would earn

YTM

$.$

Explain briefly the difference between price risk and reinvestment risk.

This risk of a decline in bond values due to an increase in interest rates is called

price risk

$.$ The risk of an income decline due to a drop in interest rates is called

reinvestment risk

$.$

Which of the following bonds has the most price risk? Which has the most reinvestment risk?

A $1-$year bond with a $10\%$ annual coupon

A $5-$year bond with a $10\%$ annual coupon

A $5-$year bond with a zero coupon

A $10-$year bond with a $10\%$ annual coupon

A $10-$year bond with a zero coupon

A

$10-$year bond with a zero coupon

has the most price risk.

A

$1-$year bond with a $10\%$ annual coupon

has the most reinvestment risk.

Calculate the price of each bond $($A$,$ B$,$ and C$)$ at the end of each year until maturity, assuming interest rates remain constant. Round your answers to the nearest cent.

Years Remaining

Until Maturity Bond A Bond B Bond C

$12$ $ fill in the blank $32$

$ fill in the blank $33$

$ fill in the blank $34$

$11$ $ fill in the blank $35$

$ fill in the blank $36$

$ fill in the blank $37$

$10$ $ fill in the blank $38$

$ fill in the blank $39$

$ fill in the blank $40$

$9$ $ fill in the blank $41$

$ fill in the blank $42$

$ fill in the blank $43$

$8$ $ fill in the blank $44$

$ fill in the blank $45$

$ fill in the blank $46$

$7$ $ fill in the blank $47$

$ fill in the blank $48$

$ fill in the blank $49$

$6$ $ fill in the blank $50$

$ fill in the blank $51$

$ fill in the blank $52$

$5$ $ fill in the blank $53$

$ fill in the blank $54$

$ fill in the blank $55$

$4$ $ fill in the blank $56$

$ fill in the blank $57$

$ fill in the blank $58$

$3$ $ fill in the blank $59$

$ fill in the blank $60$

$ fill in the blank $61$

$2$ $ fill in the blank $62$

$ fill in the blank $63$

$ fill in the blank $64$

$1$ $ fill in the blank $6$