18 May QuestionA 20-year, 8% semiannual coupon bond with a pa
Question
b. What is the bond’s current yield?
c. What is the bond’s capital gain or loss yield?
d. What is the bond’s yield to call?
NOW ANSWER THE FOLLOWING NEW QUESTIONS:
e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)
f. Now assume the date is 10/25/2010. Assume further that a 12%, 10-year bond was issued on 7/1/2010, pays interest semiannually (January 1 and July 1), and sells for $1,100. Use your spreadsheet to find the bond’s yield.
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