Question

A 7% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 7.4352%.

a. What is the bond's price? Do not round intermediate calculations. Round your answer to the nearest cent.

b. What is the bond's YTM? Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

Information provided:

Face value= Future Value = $1,000

Coupon rate= 7%/2= 3.5%

Coupon payment= 0.035*$1,000= $35

Time period= 5 years*2= 10 semi-annual periods

a.Current Yield is calculated using the below formula:

Current Yield= Annual interest/ Current price

0.074352= $35*2/ Current price

Current price= $70/ 0.074352

= $941.47.

b.The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -941.47

N= 10

PMT= 35

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 4.2299.

Therefore, the yield to maturity is 4.2299%*2= 8.4598% 8.46%.