Jason Greg is a recent retiree who is interested in investing some of his savings in corporate bonds. Listed below are the bonds he is considering adding to his portfolio.
Bond A has a 7.5% semiannual coupon, matures in 12 years, and has a $1,000 face value.
Bond B has a 10% semiannual coupon, matures in 12 years, and has a $1,000 face value.
Bond C has an 11.5% semiannual coupon, matures in 12 years, and has a $1,000 face value.
22
Each bond has a YTM of 10%.
a. Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, discount or par.
b. Calculate the price of each of these bonds.
c. Calculate the current yield for each bond.
d. If the yield to maturity for each bond remains at 9%, what will be the price of each bond 1 year from now?
e. Price each bond and explain how the number of years to maturity and the coupon rate affect the current price of bonds. Assume a YTM of 7%.
1. A 4-year bond with a 9% annual coupon
2. A 4-year bond with a zero coupon
3. A 15-year bond with a 9% annual coupon
4. A 15-year bond with a zero coupon
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