Question B3 (20 marks)

a. A bond has a current yield of 9% and a yield to maturity of 10%. Evaluate if the bond is selling at premium or discount. (4 marks)

b. A 10%, 25-year callable bond has a par value of $1,000 and a call price of $1,075. The first call date is in five years. Coupon payments are made semiannually.

Required:

i. Compute the current yield, yield to maturity and yield to call of the bond, given that it is currently priced at $1,200. (10 marks)

ii. Based on part a, suggest which yield is the most appropriate for investor to value the bond. (6 marks)