Yield to Maturity of the Bonds Assignment | Homework For You
June 9th, 2020
(a) Bond underwriters agree to purchase a corporate issuer’s new bonds at a specific price, usually near 100% of face value, and then attempt to resell the bonds to the public. The act of reselling takes some time. Underwriting fees increase with the maturity of the bonds. Provide an explanation for this pattern of fees. (6 marks)
(b) Assume the yield curve is flat at 4%. There are a 3-year zero coupon bond and a 3-year coupon bond that pays a 5% coupon annually.
(i) What are the YTMs of these two bonds? (2 marks)
(ii) Suppose the yield curve does not change in the future. You invest $100 in each of the two bonds. You re-invest all coupons in zero coupon bonds that mature in year 3. How much would you have at the end of year 3? (2 marks)Get Finance homework help today