Reference no: EM131251900
Consider the following two bonds, each with a face value of F = $10, 000,currently being sold in the primary market:
A: a 2 year coupon bond with a coupon rate of cA = 5 percent and pricedat PA(t) = $10, 000.
B: a console with an annual coupon payment of $500 and priced atPD(t) = $10, 000.
(a) Calculate the yield to maturity on each bond, ij , j = A, B,
(b) Suppose that market conditions remain unchanged over the nextyear, so that interest rates remain where they were when the bondswere initially sold in the primary market. First, calculate the maximumvalue that others would be willing to pay for each bond inthe secondary market, Pj (t + 1), j = A, BSecond, calculatethe one-year rate of return, retj , for each bond, assuming that it issold at that maximum price, Pj (t + 1).
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