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07problem 3/22/2010 7:10 12/14/2005 Chapter 7. Solution to End-of-Chapter Comprehensive/Spreadsheet Problem Problem 7-21 Clifford Clark is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds: Each bond has a yield to maturity of 9 percent. a. Before calculating the prices of the bonds, indicate whether each bond is trading at a premium, discount, or at par. Bond A is selling at a discount because its coupon rate (7%) is less than the going interest rate (YTM = 9%). Bond B is selling at par because its coupon rate (9%) is equal to the going interest rate (YTM = 9%). Bond C is selling at a premium because its coupon rate (11%) is greater than the going interest rate (YTM = 9%). Work parts b through e with a spreadsheet. You can also work these parts with a calculator to check your spreadsheet answers if you aren't confident of your spreadsheet solution. You must then go on to work part g with the spreadsheet. b. Calculate the price of each of the three bonds. Basic Input Data: Bond A Bond B Bond C Years to maturity: 12 12 12 Periods per year: 1 1 1 Periods to maturity: 12 12 12 Coupon rate: 7% 9% 11% Par value: $1,000 $1,000 $1,000 Periodic payment: $70 $90 $110 Yield to maturity: 9% 9% 9% $856.79 $1,000.00 $1,143.21 c. Calculate the current yield for each of the three bonds. Current yield = Annual coupon / Price Bond A Bond B Bond C Current yield = 8.17% 9.00% 9.62% d. If the yield to maturity for each bond remains at 9 percent, what will be the price of each bond 1 year from now? What is the expected capital gains yield for each bond?
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EFM-07problem - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17...

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