Question
You buy a bond with a coupon rate of 5% that matures in 15 years for a price of $816.08. The bond has a face
You buy a bond with a coupon rate of 5% that matures in 15 years for a price of $816.08. The bond has a face value of $1000 and it pays coupon payments semiannually.
a) What is the annualized yield on the bond?
b) If the bond pays semiannual instead of annually, what is the new semiannual yield?
c) If inflation is expected to occur at an annual rate of 2% over the next 15 years, what is the annualized real rate of return that you expect to earn on this bond?
d) A similar U.S. dollar-denominated bond issued in Europe pays coupons once per year. This bond also has a 15-year maturity and a 6 percent coupon rate, but it is selling to yield 8.16 percent. What is the current price of this bond?
e) Which of these bonds is the better buy? Explain.
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