Part (I)

James purchased a $1,000, 5 year, 5% bond two years ago when the prevailing interest rate was 6%. He wants to sell the bond later this month. The current market rate is 4%.

REQUIRED:

Calculate the taxable capital gain when James sells the bond this month.

Part (II)

Irene is considering the purchase of a Nomega Corp bond with a face value of $20,000 and 20 years remaining to maturity. The coupon on the Nomega bond is 5%, while the current market interest rate is 7%.

REQUIRED:

What price should Irene pay for the Nomega bond? (Disregard taxes.) (6 Marks)

What is the Effective Annual Rate of Return? (2 Marks)

If this yield guaranteed? Explain why or why not. (2 marks)