1. What is the maximum price you would be willing to pay for a bond with 12% coupon
and 7 years to maturity assuming that you plan to hold the bond until maturity? Your
cost of capital is 10%.
2. What price would you pay for the bond in Problem 1 if you only planned to hold the
bond for 4 years and then could sell it for $1100? Your cost of capital is 10% and you
will sell the bond for $1100 immediately after you receive the eighth interest payment.
3. What price would you pay for the bond in Problem 1 if you plan to hold the bond for 5
years and sell it for $1050 immediately before you receive the tenth interest payment?
4. Today you can purchase for $900 a 15% coupon bond that will mature in 10 years.
What will be your yield to maturity (YTM) if you hold the bond until maturity and are
able to reinvest all cash flows when they occur at the YTM?
5. What will be your realized holding period return (HPR) for the bond in Problem 4 if you
only hold it for 6 years and then are able to sell it for $1200 after receiving the twelfth
interest payment? (You are able to reinvest all cash flows at the HPR.)
6. What will be your realized holding period return if you hold the bond in problem 4 for
three years and sell it for $800 immediately before you would receive the sixth interest
payment? (You will reinvest all cash flows at the HPR.)
7. What will be the holding period return for the bond in problem 4 if you hold it until
maturity but are only able to reinvest the cash flows at a fixed rate of 4% compounded