1. ABC Co. is planning to issue bonds that have a face value of $100 million, a coupon rate of 5% paid semi-annually, and a maturity of 20 years.
a. What are the $-values and timing of the promised payments ABC Co. will make to the holders of these bonds?
b. If investors demand an interest rate of 4% to lend money to ABC Co., how much money can ABC Co. expect to raise by issuing and selling these bonds?
2. DEF Inc. bonds mature in 3 years, have a face value of $1,000, and a coupon rate of 4% paid annually. If the interest rate for these bonds is 3%:
a. What is the price of this bond today (i.e., at t = 0)? What do you expect the price of this bond will be in one year (i.e., at t = 1)? In two years (i.e., at t = 2)?
b. What is the expected return for an investor who buys this bond at t = 0 and holds it until t = 1?
c. What is the expected return for an investor who will buy this bond at t = 1 and hold it until t = 2?
d. What is the expected return for an investor who will buy this bond at t = 2 and hold it until it matures at t = 3?
3. GHI Inc. bonds mature in 5 years, have a face value of $1,000, and a coupon rate of 3% paid annually. These bonds are currently priced at $1,025, which implies that these bonds have a yield-to-maturity (YTM) of approximately 2.46%.
If you purchase one of these bonds today and one year from now these bonds have
a. YTM of 2.7%, what is your one-year holding period return from this investment?
4. JKL Inc. bonds mature in 25 years, have a face value of $1,000, and a coupon rate of 3% paid annually. These bonds are currently priced at $1,100, which implies that these bonds have a yield-to-maturity (YTM) of approximately 2.46%.
If you purchase one of these bonds today and one year from now these bonds have
a. YTM of 2.7%, what is your one-year holding period return from this investment?
4. 5. Refer to questions #3 & #4. Briefly explain why two bonds that have an equal YTM today, and then again have an equal YTM one year later, have different one-year holding period returns.