Bloomington Inc. issues a 20-year 6% annual coupon bond exactly Jan 6th, 2015 (a
ID: 2731131 • Letter: B
Question
Bloomington Inc. issues a 20-year 6% annual coupon bond exactly Jan 6th, 2015
(a)Calculate the yield to maturity at the time of the issue if the bond is issued at a $82.60 discount.
(c) On Jan 6th, 2016, you check the Wall Street Journal and find that comparable bonds are yielding 5% annually. What is the price of the bond on January 6th, 2016?
(d) You purchase the bond at the time of the issue (use the YTM from part (a)) and decide to sell it onthe problem set due date (use the 9% yield to maturity). What is your return on this bond trade?
Explanation / Answer
Answer:(a) Calculation of the Yield to maturity:
$82.60=($100*6%)*PVIFA(r%,20)+$100*PVIF(r%,20)
r ( Yield to maturity)=7.74%
Answer:(c) Price of Bond As on 6 jan 2016:
=($100*6%)*PVIFA(5%,1)+$100*PVIF(5%,1)
=5.714+95.24
=100.954
Answer:(d) Price of Bond if YTM is 9%
=6*PVIFA(9%,20)+$100*PVIF(9%,20)
=$72.61
Return=(72.61-82.60)/82.60=-12.09%