How to solve the following

Acumenix Corp has 10.25% semiannual-pay bonds outstanding that have a $1,000 par value and 25 years remaining until maturity that are currently selling for $865.50.

a. What is the yield to maturity (YTM) for these bonds?

b. What is the current yield for these bonds?

c. Does the current yield represent the rate of return an investor should expect to earn on a bond if she holds the bond until maturity? Why or why not?

2

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond S matures in 1 year, while Bond L matures in 30 years.

a. Compute the value of Bond S at required rates of return of 5%, 10%, and 15%.

b. Compute the value of Bond L at required rates of return of 5%, 10%, and 15%.

c. Define interest rate risk for a bond. Which bond, S or L, has more interest rate risk?