Question

1) Which of the following statements is correct?

a) If a bond is at a discount, the coupon rate is less than the current yield, which is less than YTM.

b) Current yield is the ratio of annual coupon payment divided by the par value.

c) When the coupon rate is higher than the market rate, the bond is priced at a discount.

d) When the market rate is higher than the coupon rate, the bond is priced at a premium.

2) What is the yield to maturity on an 8-year, 10-percent bond that pays interest semi-annually, which is now priced at $972? Use a financial calculator.

a)10 percent

b)10.53 percent

c)10.03 percent

d) 5.26 percent

Answer 1

1. a. This statement is true. If the bond is at discount it implies that the coupon is lower than the market rate or YTM due to which the bonds price is lower than par.

b. Incorrect since current yield=Coupon/ Price

c. Incorrect since when coupon is higher than market rate, the bond sells at premium.

d. Incorrect since when coupon is higher than market rate, the bond sells at premium.

1. B: 10.53%

In financial calculator, enter FV=1000, PV=-972

N=8*2=16

PMT= 10%*1000/2= 50

Solve for I/Y as 5.2632

YTM=5.2632%*2= 10.53^