Jason has just bought a bond that pays 2% annual coupons with $1,000 face value and 30
Question:
Jason has just bought a bond that pays 2% annual coupons with $1,000 face value and 30 years to maturity.
(a) If the yield of the bond bought today was 3%, what was its purchase price?
(b) One year later, the bond's YTM has dropped to 2.5%. If you sell the bond immediately after receiving the coupon,
i) what is the bond’s current yield?
ii) what is the bond’s capital gains yield (CGY)?
iii) what is the bond’s total (holding period/1-year total) yield?
(c) Now suppose another year has passed and the bond’s YTM remains unchanged at the previous year’s (Year one) level. If you sell the bond immediately after receiving the second year’s coupon, calculate
i) the 2-year CGY
ii) the total interest incomes (coupon and reinvestment of coupons) for the two years
iii) the 2-year holding period/total yield.
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim