Assignment: Throughout this question consider the following bond: face value of $1,000, coupon rate is 8%, semi-annual coupon payments, 4 years of maturity, and a purchase price of $1,055.69.
Question 1: Calculate the current yield and yield to maturity on the bond as of the date of purchase.
Question 2: Calculate the current yield and bond price on each anniversary date of the bond purchase until maturity. Suppose on each of these dates the yield to maturity on the bond is 7%, 6.6%, 6.2%, and 6.36%, respectively.
Question 3: Assume instead of holding the bond until maturity, you sell the bond on the second anniversary of its purchase (right after you receive the last coupon). Based on your results in part (b) above, what is your total rate of return over this 2-year holding period? What is your annual rate of return over the same period? Assume you can reinvest the previous coupons at an APR of 10% quarterly compounded.