Following you will find data on $1000 par value bonds issued by Young Corporation, Thomas Reports and Entertainment Inc. at the end of 2003. Assume you are thinking about buying these bonds as of January 2004. Answer the following questions for each of these bonds:
1. Calculate the values of the bonds if your required rates of return are as follows: Young Corp 6%: Thomas Resorts, 9% and Entertainment Inc. 8%:
Coupon Interest Rates = 7.8%
Years to Maturity = 10
Coupon Interest Rates = 7.5%
Years to Maturity = 17
Coupon Interest Rates = 7.975%
Years to Maturity = 4
2. In December 2003, the bonds were selling for the following amounts:
Young Corp = $1030
Thomas Resorts = $973
Entertainment Inc = $1035
What were the expected rates of return for each bond?
2a. How would the values of the bonds change if (i) your required rate of return and (k) increases 3 percentage points of(ii) your required rate of return (k) decreases 3 percentage points?
2b. Explain the implications for your answers in questions 2 and2a as they relate to interest rate risk, premium bonds, and discount bonds
2c. Compute the duration for each of the bonds, Interpret your results.
2d. What are some of the things you can conclude from these computations?
2e. Should you buy the bonds? Explain.