a) Explain the relationship between the yield-to-maturity and the coupon rate of a premium bond.(2 points) b)

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Question:

a) Explain the relationship between the yield-to-maturity and the coupon rate of a premium bond. (2 points)

b) ABC Ltd issues two different bonds with the same yield to maturity:

20-year zero coupon bond
15-year, six-month coupon bond

Explain which bond is less exposed to interest rate risk. (2 points)

c) ABC Ltd plans to issue a 16-year, six-month coupon bond with a face value of $1,000 and a coupon rate of 6.5%. The nominal return to maturity of potential investors is estimated to be 7.6% per annum. If the firm aims to raise $15 million, calculate the required number of six-month coupon bonds (expressed as an integer) to issue. (3 points)

d) You purchase a 9% semi-annual coupon issued by XYZ Ltd with 12 years to maturity and is currently trading at par. ^{As soon as you get the 6th} coupon payment after 3 years, you sell the bond to your best friend. Your best friend's nominal return to maturity is 7% per annum. Write an equation that can be solved to find your total realized return over the 3-year holding period. (3 points)