Question

A coupon bond has a face value of $20,000 and a coupon rate of 6%. The current price of the bond is $19,342. The expected price at the end of the year is $20,990.  (When entering number answers, round to 2 decimal places and do not use commas or $ or %).

1. What is the value of the coupon payment?

2. Calculate the Current Yield on this bond using today’s price.

3. At today’s price, is the yield to maturity on this bond greater than or less than the coupon rate?

4. Calculate the expected rate of return on this bond for the year.

Please show work.

Answer 1

a.

Value of coupon payment = $20,000 × 6%

= $1,200

Value of coupon payment is $1,200.

b.

Current Yield = Annual Coupon payment / Current Price

= $1,200 / $19,342

= 6.20%

Current Yield of bond is 6.20%.

c.

The relationship between price of bond and market interest rate is inverse. That is when interest rate rise, price of bond decreases and when interest rate falls bond price increase. Since, Current price of bond is less than Par value so Yield to maturity of bond must be more than coupon rate of bond.

d.

Expected rate of return = ($20,990 + $1,200 - $19,342) / $19,342

= $2,848 / $19,342

= 14.72%

Expected rate of return is 14.72%.