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A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.)
Basic Input Data:
Years to maturity:
20
Periods per year:
2
Periods to maturity:
Coupon rate:
8%
Par value:
$1,000
Periodic payment:
Current price
$1,100
Call price:
$1,040
Years till callable:
5
Periods till callable:
What is the bond’s yield to maturity?
What is the bond’s current yield?
What is the bond’s capital gain or loss yield?
What is the bond’s yield to call?
How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)
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