Question $3$

Use the following information to answer the questions.

Bond A Bond B

Face Value

$10001000$

Coupon rate

$10\%$

$8\%$

Coupons paid out

Semi$-$annually Quarterly

Years to maturity

$44$

Bond price

$800?$

Suppose bond A and B have the same YTM$.$

a$.$ What is the yield to maturity of bond A$?$

b$.$ What is the price of bond B$?$

c$.$ What is the current yield of bond B$?$

d$.$ What is the EAR $($effective annual rate$)$ of these two bonds?

e$.$ Suppose the company that issued the bond A is having cash flow problems and has asked its bondholders to accept the following deal: Instead of making the scheduled semi$-$annual coupon payments, the firm will pay $$100$ coupon payment every other year till the bond matures. In other words, there will be four $$100$ coupon payments, one each at the end of year $2,$ year $4,$ year $6,$ and year $8.$ Due to changes in market condition, the EAR $($effective annual rate$)$ of the bond is now $6\%.$ If this plan is implemented, what is the market value of this bond today?