QUESTION 2 (20 MARKS)

(a) The Bonsai Nursery Corporation has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments. If there are twelve years remaining prior to maturity and these bonds are selling for $876.40, what is the yield to maturity for these bonds? (5 marks)

(b) Petty Productions Inc. recently issued 30-year $1,000 face value, 12% annual coupon bonds. The market discount rate for this bond is only 7%. What is the current price of this bond? (5 marks)

(c) Explain the connection between coupon rate of a bond and the yield to maturity. (10 marks)