1) To begin, assume that it now january 1, 1993, and that each bond in table 1 matures on december 31 of the year listed. further, assume that each bond has a $1000 par value, each has a 30 year maturity when it was issued, and the bonds currrently have a 10 percent required nominal rate of return.
a) Why do the bonds coupon rates vary so widely?
b) What wuld be the value of each bond if they had annual coupon payments?
c) TECO's bonds, like virtually all bonds, actually pay interest semiannually. What is each bond's value under these conditions? Are the bonds currently selling at a discount or at a premium?
d) What is the effective annual rate of return implied by the values obtained in part c?
e) Would you expcet a semiannual payment bond to sell at a higher or lower price than an otherwise equivalent annual payment bond? Now look at the 5- year bond is parts b and c. are the prices shown consistent with your expectations?
2) Now regardless of your answers to question 1, assume that the 5 year bond is selling for $800.00, the 15 year bond is selling for $865.49 and the 25 year bond is selling for $1,220.00. (Note: Use these prices, and assume semiannual coupons, for the remainder of the questions). a. Explain the meaning of the term "yield to maturity" B. What is the nominal ( as opposed to effective annual) yield to maturity (YTM) on each bond? C. What is the effective annual YTM on each issue? D. In comparing bong yields with the yields on other securities, Should the nominal or effective YTM be used? explain.