What is the yield to maturity

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Question - You have been hired as an intern at a major investment firm. Your superior then gives you the following bonds to analyze.

A. Corporate bond with a face value of $1,000 that matures in 4 years with annual coupon rate of 4% and yield to maturity of 4%.

B. A risk-free bond that pays one coupon of $250 each year with a face value of $1,000 in 3 years.

C. A zero-coupon bond with a face value of $5,000 that matures in one year with a yield to maturity of 20 %.

The current on year interest rate is 1%. It is also known with certainty that the one-year risk free rate will be 2% the following year, and 3% the year after

a. For each product, what is the purchase price?

b. The issuer of the zero-coupon bond told you that there is half probability that it only repay back $3,000 to the investors. What is the yield to maturity and the expected return on that bond?

c. Suppose you buy the Bond A today. After two years, the interest rates fall and the yield to maturity decreases to 2.5%, what would be your annualized holding period if you decide to sell the bond after two years?

Reference no: EM132185170

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