Miller Corporation has a premium bond making semiannual payments. The bond pays an 8 percent coupon, has a YTM of 6 percent, and has 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. The bond pays a 6 percent coupon and has a YTM of 8 percent, and also has a 13 years maturity. Assume a face value of $1,000 for both bonds.

(a) If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? One day before maturity?

(b) Suppose the YTM increases 1 percent for each of the bonds (7 percent and 9 percent, respectively). Calculate the Holding Period Yield of the one-year investment for each of the bonds (from today to one year from today).

Note: Holding Period Yield is the total effective annual return for the investor that buys the bond today and sells the bond in one year, given the change in interest rates. The return can be decomposed in the income component (current yield) and the capital gain component (capital gain yield).

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