A Bond has the following terms: Face Value: $1,000 Annual Coupon: $50 Maturity:

ID: 2750741 • Letter: A

Question

A Bond has the following terms:

Face Value: $1,000

Annual Coupon: $50

Maturity: 10 years

a. What is the bond’s price if the current market has current yields for similar debt of 7%?

b. What would be the price is comparable current market yields are 6% and the bond has 5 years to maturity instead of 10?

c. If rates decline to 4% and there are 3 years to maturity, what would be the bond’s price?

d. What is the Current Yield of the bond given the price and assumptions in (c)?

e. What is the Yield to Maturity of the bond given the price and assumptions in (c)?

Curent Price of Bond = 50 * PVIFA( 10 yr , 7% ) + 1000 * PVIF( 10 yr, 7%) = 50 *7.023 + 1000 * 0.508 = 859.15

Price of Bond = 50 * PVIFA( 5 yr , 6% ) + 1000 * PVIF( 5 yr, 6%) = 50 * 4.212 + 1000 * 0.747 = 957.60

Price of Bond = 50 * PVIFA( 3 yr , 4% ) + 1000 * PVIF( 3 yr, 4%) = 50 *2.775 + 1000 * 0.889 = 1027.75

Current Yield = Bond Interest / Bond Market Price = 50 / 1027.75 = 4.865%

YTM of Bond = interest rate used to price the bond = 4%

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