Question
Interest rate on AAA rated corporate bonds=5% in January 2006. A year later (Jan 2007) the interest rate=6%. IBM issued a 10 year, 5% coupon
Interest rate on AAA rated corporate bonds=5% in January 2006. A year later (Jan 2007) the interest rate=6%. IBM issued a 10 year, 5% coupon bond on January 1,2006. Bonds pay interest annually. a. Compute the market value of the bond at the time of issue? b. Compute the market value of the bond one year after issue if the market yield for similar-risk bonds was 6% on January 1, 2007? c. The bonds are sold in 2007. Compute the 2006 capital gain yield, current yield and total yield? d. Now suppose that the market interest rate on the bond (rd) is 5% in 2007. Compute the 2006 capital gain yield, current yield and total yield?
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