Bond valuation
Calculate the price of a bond with 20 years remaining until it is due. The coupon rate is 7%, par value is $1000. The required return on debt is 6% (equivalent risk)
Now assume a year has passed. Calculate the price of the bond now with 19 years remaining until it is due. The required return on debt has fallen to 4% (equivalent risk)
What is the capital gain (both $ and %) from holding the bond for a year (in A) and selling it at the price you calculated in (B)?
What is the coupon yield over the period?
What was the total return from holding for a year?
Now assume the required return on debt remained at 6%. Repeat B-E assuming that the required return on debt remained at 6%.