Peter is analyzing the following three bonds for investment:
Bond A
A 15 - year, $1,000, 5% semi - annual coupon bond issued by Company A
Bond B
A 1 0 - year, $1,000, 6% semi - annual coupon bond issued by Company B
Bond C
A 15 - year, $1,000, zero coupon bond issued by Company C
(a) If Bond C ( a zero coupon bond) is currently trading at $670 , what is YTM of Bond C ? Assume annual compounding.
(b) If Bond A is currently trading at par , what is the market price of Bond B if it has the same YTM as Bond A?
(c) i) What is the current yield of Bond A?
ii) Suppose Bond A’s YTM drops by 1% one year later. What is the capital gains yield of Bond A at that time?
(d) If Peter expects the interest rate to drop in the coming year, which bond (Bond A, Bond B or Bond C) would Peter choose to buy today? Explain briefly.