Assume that you are an investor and are in the market forcorporate debt. You run across XYZ Corporation'sbonds which have a 20 year term a 7.5% coupon (interest paidsemi-annually) and were issued five years ago ( Sep 1st.2005) at par. Over the last five years, interest rates havefluctuated substantially and the following table shows the requiredreturns for XYZ bonds for the last 5 years. In allcases assume that the coupons are not reinvested.
|
Date
|
Required Return
|
|
Sep 1st.,2006
|
8.50%
|
|
Sep 1st.,2007
|
6.75%
|
|
Sep 1st.,2008
|
5.95%
|
|
Sep 1st.,2009
|
6.35%
|
|
Sep 1st.,2010
|
7.00%
|
(a) Calculate the annual rate of return for each of the last five years (Sep 1st of each year) since the bonds wereissued.
(b) If the required return on thisbond a year from now, September 1st., 2011, is expectedto remain the same at 7.00%, what will be the expected rate ofreturn for the coming year?
(c) Repeat part (b) assuming theexpected required return at September 1st., 2011 is6.00%.