1) Bond Yields and Rates of Return
A 10-year, 12% semi annual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued).
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?
2) Inflation Risk Premiums
Because of a recession, the inflation rate expected for the coming year is only 3%. However, the inflation rate in Year 2 and the after is expected to be constant at some level above 3%. Assume that the real risk-free rate is r* = 2% for all maturities and that there are no maturity premiums. If 3-year Treasury notes yield 2 percentage points more than 1-year notes. what inflation rate is expected after Year 1?