Question

4. You have the opportunity to purchase a 25-year, $1,000 par value bond that has an annual coupon rate of 9%. If you require a YTM of 7.6%, how much is the bond worth to you?  

5. A $1,000 par value bond that has a current price of $950 and a maturity value of $1,000 matures in three years. If interest is paid annually and the bond is priced to yield 9%, what is the bond’s annual coupon rate?  

8. A bond is priced in the market at $920 and has a coupon of 7%. Calculate the bond’s current yield.  

Answer 1

4)

Coupon = 0.09 * 1000 = 90

Price = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Price = 90 * [1 - 1 / (1 + 0.076)²⁵] / 0.076 + 1000 / (1 + 0.076)²⁵

Price = 90 * 11.04985 + 160.21133

Price = $1,154.70

5)

Price = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

950 = Coupon * [1 - 1 / (1 + 0.09)³] / 0.09 + 1000 / (1 + 0.09)³

950 = Coupon * 2.53129 + 772.18348

Coupon = $70.25

Annual coupon rate = (70.25 / 1000) * 100

Annual coupon rate = 7.025%

8)

Coupon = 0.07 * 1000 = 70

current yield = (Annual coupon / price) * 100

current yield = (70 / 920) * 100

current yield = 7.61%