1. The current par yield (the yield y that solves ParValue = +++ + 1+y (1+y)...

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1. The current par yield (the yield y that solves ParValue = +++ + 1+y (1+y) c is the coupon payment at the end of each year) curve is given by: C ParValue+c + + where (1+y)n Maturity (in year) 1 2 3 4 5 Par Yield (in percentage) 3 4 5 6 7 There are two default-free bonds, A and B. Cash flows and prices are as following: Bond Price CF year 1 CF year 2 CF year 3 CF year4 CF year 5 A 110 10 110 B 116.84 10 10 10 10 110 (a) Calculate the yield to maturity for bonds A and B. Which bond has a higher yield? (b) What is the value of each bond? Is yield to maturity a good criterion for investment decisions? 1. The current par yield (the yield y that solves ParValue = +++ + 1+y (1+y) c is the coupon payment at the end of each year) curve is given by: C ParValue+c + + where (1+y)n Maturity (in year) 1 2 3 4 5 Par Yield (in percentage) 3 4 5 6 7 There are two default-free bonds, A and B. Cash flows and prices are as following: Bond Price CF year 1 CF year 2 CF year 3 CF year4 CF year 5 A 110 10 110 B 116.84 10 10 10 10 110 (a) Calculate the yield to maturity for bonds A and B. Which bond has a higher yield? (b) What is the value of each bond? Is yield to maturity a good criterion for investment decisions?

Answer rating: 100% (QA)

a To calculate the yield to maturity YTM for bonds A and B we need to solve for the discount rate th... View the full answer