The following is certain information about three bonds. All numerical answers should be

calculated to at least two decimal places. By convention, the face value of all bonds is taken as

$100. For simplicity, assume coupon payments are paid once a year.

Bond A: coupon rate = 9.75%, term to maturity=10 years, current price = $160.55.

Bond B: coupon rate = 11.25%, term to maturity=5 years, yield to maturity =2.35% p.a.

Bond C: coupon rate = 6%, term to maturity = 1 year, yield to maturity = 1.45% p.a.

1.1. Find the current yield and yield to maturity of Bond A.

1.2. Find the current price of Bond B. From your answer, what do say about this price when

compared with the face value of the bond?

1.3. Suppose an investor buys all these three bonds today at their current prices. Further suppose the

market interest rates increase across the board by 200 basis points a year later. For each bond, find

the new bond price, the rate of capital gain or loss and the rate of return.

1.4. From your numerical answers, what can you infer about the relationship between bond prices

and interest rates. Explain briefly.

1.5. Also, what can you infer about the relationships between the rate of return and the maturity of

bonds?