XXX\'s bonds have 3 years remaining to maturity. The bonds have a face value of
ID: 2714042 • Letter: X
Question
XXX's bonds have 3 years remaining to maturity. The bonds have a face value of $1000 and a yield to maturity of 8%. They pay interest semiannually and have 6% coupon rate. What is their current yield? ABC Corporation has issued bonds that bear 12% annual coupon rate paid quarterly. The bonds mature in 3 years, have a face value of $1000 and a yield to maturity of 8%. What is the value of these bonds? Will investor buy this bond if the market price is $1300? How the price of this bond will change over time until maturity (the trend)?Explanation / Answer
Answer:
1) Current yield = Anuual cash flow/ MKT price
Given the current market rate of 8.000% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 6.000% (compounding Semi-Annually), should be selling for $947.58 (selling at a discount).
Therefore Current yield = 123.6/947 = 13.05%
2) Given the current market rate of 8.000% for a similar bond, a bond with a face value of $1,000.00 and paying a coupon rate of 12.000% (compounding Annually), should be selling for $1,103.08 (selling at a premium).
the investor should not buy because the bond price is 1103 and should not purchase more than that.
Thank you
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