Question

Rosline Health System has bonds outstanding that have 8 years remaining to maturity, a coupon interest rate of 8% paid annually, and $1,000 par value.

a. What is the yield to maturity on the issue if the current market price is $1,124.00?

b. If the yield to maturity calculated in part a remains constant, what will happen to the value of the bonds as the maturity date approaches?

c. What is the yield to maturity on the issue if the current market price is $893.00?

d. If the yield to maturity calculated in part c remains constant, what will happen to the value of the bonds as the maturity date approaches?

Please show work.

Answer 1

Bond Par Value = $1,000

Coupon Rate = 8%

Time to Maturity = 8 years

a.

Current Market Price = $1,124

Using TVM Calculation,

YTM = [FV = -1000, PV = 1124, PMT = -80, T = 8]

YTM = 6.003%

b.

As bond is issued at premium to par value so as the maturity date approaches the market value of bond will decrease and becomes $1,000 at maturity date.

c.

Current Market Price = $893

Using TVM Calculation,

YTM = [FV = -1000, PV = 893, PMT = -80, T = 8]

YTM = 10.006%

d.

As bond is issued at discount to par value so as the maturity date approaches the market value of bond will increase ad becomes $1,000 at maturity date.