Question

PRICE AND YIELD

An 8% semiannual coupon bond matures in 6 years. The bond has a face value of $1,000 and a current yield of 8.4446%.

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

What is the bond's YTM? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

a.Information provided:

Face value = Future value= $1,000

Time= 6 years*2= 12 semi-annual periods

Coupon rate= 8%/2= 4% per semi-annual period

Coupon payment= 0.04*1,000= $40 per semi-annual period

Current yield = 8.4446%

Current yield is calculated using the below formula:

Current Yield= Annual interest/ Current price

0.084446 = $40*2 / Current price

Current price = $80 / 0.084446

= $947.35.

b.Information provided:

Face value= future value= $1,000

Current price= present value= 101%*1,000= $947.35

Time= 6 years*2= 12 semi-annual periods

Coupon rate= 8%/2= 4% per semi-annual period

Coupon payment= 0.04*1,000= $40 per semi-annual period

Enter the below in a financial calculator to compute the yield to maturity:

FV= 1,000

PV= -947.35

N= 12

PMT= 40

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

The value obtained is 4.58.

Therefore, the yield to maturity is 4.58%*2 = 9.16%.