Question

2) Assume that a company issued a bond with $1,000 face value, 10% coupon rate, 20...

2) Assume that a company issued a bond with $1,000 face value, 10% coupon rate, 20 years maturity, if this bond is sold after 5 years, how much this bond will be sold if the yield to maturity (YTM) is 8%? What is the current yield?

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Answer #1

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

Prima facie, the bond will trade at Premium as YTM<coupon rate

Year Cash flow PVAF/PVF@8% Present Value (Cashflow*PVAF/PVF)
1-20 100 9.8181* 981.81
20 1000 0.2146** 214.55

Current Market Price of Bonds = Cashflow*PVAF/PVF

= 981.81+214.55

= $1196.36

Current Yield = Annual interest/Current Market Price

= 100/1196.36

= 8.36%

Year Cash flow PVAF/PVF@8% Present Value (Cashflow*PVAF/PVF)
1-15 100 8.5595* 855.95
15 1000 0.3152** 315.24

P5 = Cashflow*PVAF/PVF

= 855.95+315.24

= $1171.19

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