Question

Question (1): As a financial manager of the Alpha investment group, you are required to rank the bonds presented on the basis of YTM/YTC. Information on the bonds are provided below. Prepare your list from the best to worse and explain your reason for that.

Seiko’s bond has 20 year maturity, 9% coupon that is paying semiannually and callable in 4 years at a call price of $1070. A bond sells at a yield to maturity of 8% currently. (Calculate YTC)

Wilson’s bonds have 12 years remaining to maturity and pay the interest annually. The Par value of the bond is $1000 and the coupon rate is 8% and the market price of the bond is $900.

Government zero-coupon bonds with face value of $1000 and maturity of 7 years and currently the price is $532.12.

Jackson rentals have a bond that matures in 6 years and 8% annual coupon. The current yield of the bond is 8.21%.

Question (2): Below are three different bonds with different information. As the financial manager of the company, you are required to choose the best bond based on its Holding Period Return (HPR)

(HPR=?1−?0+?). You are expecting YTM to increase by 0.5% for the first bond, 1.5% for the ?0

second bond, and 1% for the third bond at the beginning of first-year (you should consider these changes while calculating P1). Please show all required calculations.

1. 1- 10-year maturity bond with face value of $1000 and pay coupon $70 once per year. Currently yield to maturity of the bond is 7%.

2. 2- Zero-coupon bond with a 15-year maturity and the face value of $1000 and currently yield to maturity is 7.5%

3. 3- 15-year bond with an annual coupon payment of 9% and $1000 face value. The bond currently sells at a yield to maturity of 7%.

Answer 1

Order of bonds based on YTM/YTC is as follows:

Details of calculation as follows:

Question 2:

The best bond based on HPR is Bond 1.

Details of calculation of HPR as follows: