The U.S. government issues a coupon bond with the coupon rate 5% and the maturity 20 years. The bond with a face value of $1000 is sold at a present value of $900. Meanwhile, the Microsoft company issues a coupon bond with the coupon rate 7% and the maturity 20 years. The bond with a face value of $1000 is also sold at a present value of $900.
(1) Calculate the yield to maturity of the two bonds. Are the two bonds sharing the same yield to maturity? Why?
(2) Immediately after the 3rd coupon is paid, the Greece Debt Crisis occurs. Draw a graph to show the influence of the shock. What will happen to the required interest rates of the two bonds? Hint: Apply the theory of portfolio choice.
(3) Assuming the new present value of the U.S. government bond is $1050 calculating the new yield to maturity.
(4) Assuming the new required interest rate for the Microsoft bond is 7%, calculate the new present value.