Question:

You have recently been employed as a Fixed Income Strategist by Peacock Ltd, which is a US-based investment fund. As such, you are responsible for pricing all fixed income securities, determining their respective risk characteristics, and producing reports containing trading recommendations for Peacocks in-house traders.

1. Peacock had invested in 15,000 AAA-rated 1.25% 4-year semi-annual coupon US T-notes that were trading at 97.15 on the date of purchase, one year previously.
2. Peacock had invested in 23,500 BBB-rated 3.15% 4-year semi-annual coupon corporate bonds sold by a US-based company that were trading at 105.91 on the date of purchase, one year previously.
3. The current yield on other AAA-rated 4-year semi-annual coupon T-notes was 1.55% p.a.
4. The current yield on other BBB-rated 4-year semi-annual corporate bonds sold by US-based companies was 2.95% p.a.
5. The cumulative default rates for AAA-rated 3-year and 2-year bonds are currently 0.13% and 0.03%, respectively.
6. The cumulative default rates for BBB-rated 3-year and 2-year bonds are currently 0.80% and 0.46%, respectively.
7. Both the T-notes and corporate bonds have a nominal value of $1,000.00 per bond.
8. The US-T-Notes and corporate bonds were trading at 98.10 and 102.15, respectively, at the close of trading the previous day.
9. Peacock has a policy of maintaining an expected holding period of 1-year.

You are also aware that Peacock had a reported profit before interest and tax of $1.25 billion at the end of the last financial year and that it pays interest at the US corporate tax rate, which is currently 15% p.a.

Required:

Calculate Peacocks respective income yield, capital yield and expected holding period return on the US T-Notes.

Calculate Peacocks respective income yield, capital yield and expected holding period return on the corporate bonds.