. Bloomington Inc. issues a 20-year 6% annual coupon bond exactly a year prior t

Question

. Bloomington Inc. issues a 20-year 6% annual coupon bond exactly a year prior to the due date of Problem Set 2.

(a) Calculate the yield to maturity at the time of the issue if the bond is issued at a $82.60 discount.

(b) What would be the price on the problem set due date if the bond is priced to yield 9%?

(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

Face Value 1000 Discount 82.6 Price of Bond 917.4 a YTM =((C+(FV-MV)/20)/(FV+MV)/2)) =((60+((1000-917.40)/20))/(1000+917.40)/2)) YTM 6.69% b YTM =((C+(FV-MV)/20)/(FV+MV)/2)) 0.09 =((60+((1000-MV)/20))/(1000+MV)/2)) 0.09 =((110-0.05MV)/(500+0.5MV) 45+0.045MV 110-0.05MV 0.095MV 65 MV 684.21 c Issue date is not given so I am ignoring the date YTM =((C+(FV-MV)/20)/(FV+MV)/2)) 0.05 =((60+((1000-MV)/20))/(1000+MV)/2)) 0.05 =((110-0.05MV)/(500+0.5MV) 25.05+0.025MV 110-0.05MV 0.075MV 85 MV 1133.33 d Issue date is not given so I can not calculate the return

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