March 28, 2017

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2. You are now considering adding a corporate bond to your investment portfolio. The bond was issued last year to have 10 years to maturity (so it has 9 years remaining to maturity from today) The bond has an 8% coupon, and was sold at par ($1,000) when it was issued last year. As the market interest rates went up over the last year, the bond’s current price has fallen to $901.40.

(A). What is the YTM now?
(B). If the market interest rate remains unchanged from today until the end of this year, what will be the bond price at the end of this year?

Note: The price of the bond is determined by the future cash flows to be received from the end of this year.

(C). For the coming year (from today to the end of the this year), what would be the expected current yield and capital gain yield?

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