Question 1. Six years ago, the Singleton Company sold a 20-year bond issue with a 14 percent annual coupon rate and a 9 percent call premium. Today, Singleton called the bonds. The bonds were originally sold at their face value of $1,000. Compute the realized rate of return for investors who purchased the bond when they were issued and who surrender them today in exchange for the call price.
Question 2. An investor has two bonds in his portfolio. Each bond matures in four years, has a face value of $1,000, and has a yield to maturity equal to 9.6 percent. One bond, Bond C, pays an annual coupon of 10 percent; the other bond, Bond Z, is a zero coupon bond.
a. Assuming that the yield to maturity of each bond remains at 9.6 percent over the next 4 years, what will be the price of each of the bonds at the following time periods? Fill in the following table:
t PRICE OF BOND C PRICE OF BOND Z
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0
1
2
3
4
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b. Plot the time path of the prices for each of the two bonds.