Answer a.
Face Value = $1,000
Annual Coupon Rate = 10%
Annual Coupon = 10% * $1,000
Annual Coupon = $100
Time to Maturity = 5 years
Current Price = $889
Let Annual YTM be i%
$889 = $100 * PVIFA(i%, 5) + $1,000 * PVIF(i%, 5)
Using financial calculator/=:
N = 5
PV = -889
PMT = 100
FV = 1000
I/Y = 13.17%
Annual YTM = 13.17%
Answer b.
Face Value = $1,000
Annual Coupon = $100
Time to Maturity = 5 years
Current Price = $1,136
Let Annual YTM be i%
$1,136 = $100 * PVIFA(i%, 5) + $1,000 * PVIF(i%, 5)
Using financial calculator/=:
N = 5
PV = -1136
PMT = 100
FV = 1000
I/Y = 6.71%
Annual YTM = 6.71%
Answer c.
You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
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