Assume that in February 1968 the Los Angeles Airport authority issues a series of 3.4 percent, 30-year bonds. Interest rates rose substantially in the years following the issue, and as they did, the price of the bonds declined. In February 1981, 13 years later, the price of the bond had dropped from $1,000 to $650. In answering the following questions, assume that the bond requires annual interest payments.
a. Each bond originally sold for $1,00 par value. What was the yield to maturity of these bonds when they were issued? 3.4%
b. Calculate the yield to maturity in February 1981. 7% c. Assume that interest rates stabilized at the 1981 level and stayed there for the remainder of the life of the bonds. What would have been the bond’s price in February 1996, when they had 2 years remaining to maturity? $934.91
c. The coupon interest payment divided by the market price of a bond is called the bonds’ current yield. Assuming the conditions in part C, what would have been the current yield of a Los Angeles Airport bond (1) in February 1981 and (2) in February 1996? What would have been its capital gains yield and total yields (total yield equals yield to maturity) on those same two dates?