Price and yield An 6% semiannual coupon bond matures in 6 years. The bond has a

Question

Price and yield

An 6% semiannual coupon bond matures in 6 years. The bond has a face value of $1,000 and a current yield of 6.9105%.

What is the bond's price? Round your answer to the nearest cent.

What is the bond's YTM?

Expected interest rate

Lloyd Corporation's 13% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 10 years, are callable 3 years from today at $1,025. They sell at a price of $1,190.76, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

What is the best estimate of these bonds' remaining life? Round your answer to two decimal places.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Bond Price = Annual Coupon/Current Yield*100 = (1000*6%)/6.9105% = $868.24 or $868.2

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YTM:

Nper = 6*2 = 12 (indicates the period)

PV = 868.24 (indicates the price)

FV = 1000 (indicates the face value)

Rate = ? (indicates semi-annual YTM)

PMT = 1000*6%*1/2 = 30 (indicates the amount of interest payment)

YTM = Rate(Nper,PMT,PV,FV)*2 = Rate(12,30,-868.24,1000)*2 = 8.88%

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Part B:

Since, the bond is selling at a premium greater than par value indicating that the coupon rate is much higher than the market/expected rate of interest. It signifies that the company is most likely to call the bond than keep it till maturity. It can therefore, be concluded that life of the bond is 5 years.

Answer is 5 Years

Thanks.

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