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Richard bought one unit of a bond of Dunhill Corporation on 1-1-2005. The bond was issued as a 25-year bond on 1-1-2005, with a maturity
Richard bought one unit of a bond of Dunhill Corporation on 1-1-2005.
The bond was issued as a 25-year bond on 1-1-2005, with a maturity date of 1-1-2030. It had a face value of $1,000, carried 4% coupon payable semiannually. Its yield was 8%. On 1-1-2015, the firm renegotiated existing contract. The terms of the new contract are as follows.
- No coupon will be paid for next 7 years (years 2015 thru 2021)
- Coupon will be paid at 50% for next 5 years (years 2022 thru 2026)
- Full coupon for the reminder of the original term (years 2027 thru 2030)
- There will be no change to the par value.
On 1-1-2015, the bonds yield to maturity is 14%.
Determine the following.
- What is the bond trading on 1-1-2015?
- If Richard hangs on to the bond until maturity, what is the true yield earned?
- If Richard sells the bond on 1-1-2015, what is the holding period yield earned by Richard?
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