Consider a corporate bond with par value of $1,000 that makes annual coupon payments at a coupon rate of 10%. The bond has 12 years until maturity...

Consider a corporate bond with par value of $1,000 that makes annual coupon payments at a coupon rate of 10%. The bond has 12 years until maturity and is priced to yield 8% to maturity.

1. (a) Find the holding-period return for a 1-year investment period if the bond is selling at a yield to maturity of 7.5% by the end of the first year. (5 marks)
2. (b) Find the realised compound yield before taxes for a 2-year holding period, assuming that (1) you sell the bond after 2 years, (2) the bond yield is 7% at the end of the second year and (3) the first coupon payment can be reinvested for 1 year at a 4% interest rate. (5 marks)
3. (c) Cite one major shortcoming for each of the following fixed-income yield measures:

• Yield to maturity. (2 marks)
• Realised compound yield. (2 marks)