Question

The outstanding bonds of International Plastics mature in 5 years and pay semiannual interest payments of $40 on a $1,000 face value bond. The bonds are currently selling for $1,050. The coupon rate is _____ percent, the current yield is _____ percent, and the yield to maturity is _____ percent.

Select one:

a. 7.62; 8.00; 6.80

b. 8.00; 7.62; 6.80

c. 8.00; 7.62; 3.40

d. 4.00; 3.81; 3.40

e. 7.62; 8.00; 3.40

Answer 1

Coupon rate = $40/1000*12/6
=8%
Current yield = annual coupon / price
=$80/1050
=7.62%
Bond price =C*[1-(1+YTM)^-n / YTM] + [P/(1+YTM)^n]
Where,
C= Coupon amount
YTM = Yield To maturity
n = Number of periods
P= Par value
$1050=40 * [1 - (1 + YTM)^-10 / YTM] + [1000 / (1 + YTM) ^10]
1050/40 =[1 - (1 + YTM)^-10 / YTM] + [1000 / (1 + YTM) ^10]
26.25 =[1 - (1 + YTM)^-10 / YTM] + [1000 / (1 + YTM) ^10]
YTM =	3.40%
YTM Annually =3.40%*2 =	6.80%
Correct Option : b. 8.00; 7.62; 6.80