Problem 1: Bonds of X Corporation with a par value of $1,000 sell for $950, matu
ID: 2684299 • Letter: P
Question
Problem 1: Bonds of X Corporation with a par value of $1,000 sell for $950, mature in six years, and have a 6.5% annual coupon rate paid semiannually. Calculate the: i. Current yield. ii. Yield to maturity. iii. Suppose you buy the bonds and keep them only for 2 years. You are able to reinvest the coupon payments at 4% rate of interest. At the end of 2 years the bonds with 4 years remaining will sell to earn a yield to maturity of 6.5%. . What is your realized rate of return over this 2-year holding period?Explanation / Answer
950= 32.5PVIFA(YTM,12)+1000PVIF(YTM,12) YTM=3.78x2= 7.56% Current yeild= 32.5/950= 6.84% Suppose you keep the bond for 2 years at $950 Price of he bonds with 4 years = 37.8PVIFA(3.25%, 8)+1000 PVIF(3.25%,8)= 1036.815 Holding period return= (1036.815-950)/950= 9.138%