It is April 2014. You are evaluating a potential investment in a Zancor Industries bond. The bond has an annual coupon rate of 6.8% (and makes semiannual interest payments), 11 years to maturity, a face value of $1000, a BBB rating, and currently sells for $1016. The bond is not callable. You intend to hold this bond for two years.
a. Determine the bond's yield to maturity. What assumptions are you implicitly making when you derive this number?
b. Before you purchase the bond, new information suggests interest rates will rise during the summer of 2014. What influence, if any, will this have on your decision to purchase the bond now? (No calculations required.)
c. You decide to buy the bond, and two years pass. You were able to reinvest coupon income at an annual rate of 2% and bond's yield to maturity is 6.6%. Determine the holding period return on this investment.