r d has increased from 10% to 12% at period 1. the initial whole time to maturit
ID: 2682784 • Letter: R
Question
r d has increased from 10% to 12% at period 1. the initial whole time to maturity was 15 year INT=$100 and M=$1000. compute the pv of the bond at period 1 and 2. Compute current yield, capital gain yield, and total yield.
Finding:
e) If coupon rate smaller than r d, then the bond price is ______than its par and thus the bond sell at a discount. The bond is called______bond.
f) The market value of a bond c____ges to its par value as its maturity date approaches even if coupon rate smaller than r d.
g) Total rate of return a bond is equal to _____even if coupon rate smaller than r d
Explanation / Answer
PV of the bond when the interest rate is 10% PV= 100PVIFA(10%,15)+1000PVIF(10%,15)= $ 1000 PV of the bond when the interest rate is 12% PV= 100PVIFA(12%,15)+1000PVIF(12%,15)= $920.478 Current yield = 100/920.478= 10.86% capital gain yield= (920.478-1000)/1000= -7.95% e) If coupon rate smaller than r d, then the bond price is _less_____than its par and thus the bond sell at a discount. The bond is called___Deep-Discount Bond___bond.
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