IDENTIFY FORMULAS AND SHOW WORK.
Miller Corporation has a premium bond making semiannualpayments. The bond pays an 8 percent coupon, has a YTM of 6percent, and has a 13 years to maturity. The Modigliani Company hasa discount bond making semiannual payments. The bond pays a 6percent coupon, and has a YTM of 8 percent, and also has a 13 yearsmaturity.
Assume a face value of $1,000 for both bonds. (a) If interestrates remain unchanged, what do you expect the price of these bondsto be 1 year from now? One day before maturity?
(b) Suppose the YTM increases 1 percent for each of the bonds (7percent and 9 percent respectively). Calculate the Holding PeriodYield of the one-year investment for each of the bonds (from todayto one year from today).
Note: Holding Period Yield is the total effective annual returnfor the investor that buys the bond today and sells the bond in oneyear given the change in interest rates. The return can bedecomposed in he income component (current yield) and the capitalgain component (capital gain yield).
