Question 1: Assume that you are considering the purchase of a 30 year bond with an annual coupon rate of 6.5%. The bond has a face value of $1,000 and makes semiannual interest payments. If you require a 7.50% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for this bond?
Question 2: Now assume market conditions have changed and you are given additional information regarding the bond in problem 1. The bond is now selling for $1,225.00. What is the capital gains yield if you purchase this bond at $1,225.00? (Note that you will not use the price that you calculated in problem #1 to solve problem #2.)
Question 3: Taussig Corp.'s bonds currently sell for $1,250. They have a 7.50% annual coupon rate with interest paid annually, $1,000 par value, and 15 year maturity, but they can be called in 3 years at $1,075.00. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn on these bonds?