Question

A major chemical manufacturer has experienced a market reevaluation lately due to a number of lawsuits. The firm has a bond issue outstanding with 10 years to maturity and a coupon rate of 7% (paid annually). The required rate has now risen to 10%. The par value of the bond is $1,000.

What is the current value of these securities?

Based on the current price of the bond,  what is the current yield of this bond?

If the 7% coupon bond with time to maturity of 10 years is now selling for $932.9, what is the yield to maturity of the bond?

Answer 1

1. Information provided:

Par value= future value= $1,000

Coupon rate= 7%

Coupon payment= 0.07*1,000= $70

Required return= 10%

Time= 10 years

The current value is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 70

I/Y= 10

N= 10

Press the CPT key and PV to compute the present value.

The value obtained is 815.66.

Therefore, the current value of securities is $815.66.

2. Information provided:

Par value= future value= $1,000

Coupon rate= 7%

Coupon payment= 0.07*1,000= $70

Time= 10 years

Current price= present value= $932.9

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

FV= 1,000

PV= -932.9

PMT= 70

N= 10

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

The value obtained is 8.

Therefore, the yield to maturity is 8%.

In case of any query, kindly comment on the solution.