Bond Problem: Formulas: current yield = Dollar income Capital gains = Ending value Beg....
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Bond Problem: Formulas: current yield = Dollar income Capital gains = Ending value Beg. Value Beginning value Beginning value Bond yield = current yield + capital gains yield Suppose that one year ago Cisco Systems sold a 15-year bond issue that had a $1,000 par value and a 7 percent coupon rate. Interest is paid semiannually. a. If the bond sold at $1,000 initially, what was the market interest rate when it was sold? b. If the going rate interest rate has risen to 10 percent, at what price would the bonds be selling today? c. What would be the current yield and the capital gains yield for the year of this change to 10%? Cisco continued. d. Suppose that the interest rate remained at 10 percent for the next 10 years. What would happen to the price of the Cisco Systems bond over time? e. Explain a scenario that would cause Cisco to call their 15 year bond. f. What are the cash flows that we are discounting to determine the price of Ciscos bond?
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