Answer to Question #288168 in Economics for pho

Question

Q1.a. Suppose that Happy Lemon Inc. issues a bond with a coupon of 4% paid annually. The

bond has a maturity of 30 years and a yield to maturity of 7%. An investor purchased this bond

at a fair price and holds the bond for 1 year.

i.

If the yield to maturity at the end of bond’s life changes to 8%, what will be the rate of

return that this investor is going to earn at the end of year 1? (

Hint

: The fair price of

the bond is simply the present value today of all future cash flows from an investment

in a bond)

ii.

Is the following statement correct? Elaborate your answer.

“Current yield overstates the return of premium bonds and understates that of discount

bonds”

Answer 1

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