Question

1. A bond has a $1,000 par value, 12 years to maturity, and a 8% annual coupon and sells for $980.

a. What is its yield to maturity (YTM)? Round your answer to two decimal places.

b. Assume that the yield to maturity remains constant for the next 2 years. What will the price be 2 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.

2. Last year Carson Industries issued a 10-year, 15% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,075 and it sells for $1,270.

a. What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

b. What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.

c. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign.

Answer 1

Answer to Question 1:

Answer a.

Par Value = $1,000
Current Price = $980
Time to Maturity = 12 years

Annual Coupon Rate = 8%
Annual Coupon = 8% * $1,000
Annual Coupon = $80

Let Annual YTM be i%

$980 = $80 * PVIFA(i%, 12) + $1,000 * PVIF(i%, 12)

Using financial calculator:
N = 12
PV = -980
PMT = 80
FV = 1000

I = 8.27

So, Annual YTM is 8.27%

Answer b.

Price after 2 years = $80 * PVIFA(8.27%, 10) + $1,000 * PVIF(8.27%, 10)
Price after 2 years = $80 * (1 - (1/1.0827)^10) / 0.0827 + $1,000 / 1.0827^10
Price after 2 years = $982.10