Bond Valuation
1. Suppose that Joan just bought a 15-year bond for $902.71. The bond has a coupon rate equal to 7 percent, and interest is paid semiannually. What is the bond’s yield to maturity (YTM)? If Joan holds the bond for the next three years and its YTM does not change during that period, what return will she earn each year? What portion of the annual return represents capital gains and what portion represents the current yield?
2. Suppose that James just bought the same bond that Joan bought, but he bought it two years later for $1,034.55. If James plans to hold his bond for five years and its YTM does not change during that period, what return will he earn each year? What portion of the annual return represents capital gains and what portion represents the current yield?