Question

Orlando 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?

Answer 1

Bond Par Value = $1,000

Time to Maturity = 8 years

Coupon Rate = 8%

a.

Current Market Price = $1,124

Calculating YTM,

Using TVM Calculation,

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

I = 6.003%

b.

As the maturity date approaches, the value of bond will decrease and approach to $1,000 at maturity date.

c.

Current Market Price = $893

Calculating YTM,

Using TVM Calculation,

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

I = 10.006%

d.

As the maturity date approaches, the value of bond will increase and approach to $1,000 at maturity date.