Determine the current market prices of the following $1,000 bonds if the compara

ID: 2717982 • Letter: D

Question

Determine the current market prices of the following $1,000 bonds if the comparable rate

is 10% and answer the following questions.

Be sure you show your work here for the price and current yield and then answer

the questions below.

XY 5.25% (interest paid annually) for 20 years

AB 14% (interest paid annually) for 20 years

A. Which bond has a current yield that exceeds the yield to maturity?

B. Which bond may you expect to be called? Why?

C. If CD, Inc., has a bond with a 5.25% coupon and a maturity of 20 years but which was

lower rated, what would be its price relative to the XY, Inc., bond? Explain

Computation of market price of bonds

XY = $52.50*8.5136 + $1000*0.1486 = $595.56

AB = $140*8.5136 + $1000*0.1486 = $1340.504

(A) Bond XY

Current yeild = ($52.50/$595.56)*100 = 8.82%

YTM = {$52.50 + ($1000 - $595.56)/20}/[($1000+595.56)/2] = 9.12%

Bond AB

Current yeild = ($140/1340.504)*100 = 10.44%

YTM = {$140 + ($1000-$1340.504)/20}/[(1000+1340.504)/2] = 10.51%

None of the bonds have Current yeild that exceeds YTM

(B) Bond AB is expected to be called since its market price is lower than its face value.

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