Question

Bond prices and yields   Assume that the Financial Management​ Corporation's 1,000​-par-value bond has a 6.100% ​coupon, matures on May​ 15, 2027, has a current price quote of 108.137 and a yield to maturity​(YTM) of 4.764%.

Given this​ information, answer the following​ questions:

a.  What was the dollar price of the​ bond?

b.  What is the ​bond's current​ yield?

c.  Is the bond selling at​ par, at a​ discount, or at a​ premium? ​ Why?

d.  Compare the​ bond's current yield calculated in part b to its YTM and explain why they differ.

Answer 1

(a)-Dollar price of the bond

Dollar price of the bond = Par Value of the Bond x Percentage Quote of the Bond

= $1,000 x 108.137%

= $1,081.37

(b)-Bond's current yield

Bond's current yield = (Coupon Amount / Dollar Price of the Bond) x 100

= [($1,000 x 6.10%) / $1,081.37] x 100

= [$1 / $1,081.37] x 100

= 5.64%

(c)-Here, the Bond is selling at PREMIUM, since the Price of the Bond ($1,081.37) is higher than the Par Value ($1,000) of the Bond

(d)-Comparison

The Current Yield of the Bond (5.64%) is higher than the Yield to Maturity of the Bond (4.764%), Because the lower YTM would result in higher Bond Price and which will result in the Current Yield to be higher than the YTM.