Following is current information about two outstanding bonds of two different corporations, Home Depot, Inc. and Lowes Companies, Inc. The bonds are identical (i.e., they have the same features and provisions) except for their credit ratings. The face value of each bond is $1,000. Interest is paid semiannually on both bonds.

Company Name Bond Rating Coupon Rate Market Price Term to Maturity

Home Depot (HD) A 5.88% $1,057.64 13 years Lowes (LOW) BBB 5.80% $1,015.08 13 years

1. Using the information provided, complete the following:
   1. Compute the yield to maturity (YTM) for each bond. Show and label the numbers you input into your calculator (i.e., indicate in which TVM key particular numbers are entered).
   2. Why are the YTMs on the two bonds different? Explain/Discuss your answer.
   3. If Home Depot wants to issue a new bond today to raise new funds, what should be the coupon rate on the new bond. Explain why.
2. One year from today, what should be the market values of the two bonds under the following conditions? Show and label all your work.
   1. Their yields to maturity do not change. That is, their YTMs stay the same as those computed in 1(A)
   2. The expected inflation rate increases by 1.5 percent.
3. For part 2(A), compute current yield, the capital gains yield, and the total yield generated by the Home Depot bond during the year. Show and label all your work, including intermediate computations.