Aloha Inc. has 5 percent coupon bonds on the market that have 4 years left to ma

Question

Aloha Inc. has 5 percent coupon bonds on the market that have 4 years left to maturity. If the YTM on these bonds is 6.32 percent, what is the current bond price?

Price ?

The yield to maturity is the ?

1)discount rate that equates a bond's price with the present value of the bond's future cash flows.

2)rate you will earn if your bond is called on the earliest possible date.

3)rate computed by dividing the annual interest by the par value.

4)rate used to compute the amount of each interest payment.

5)rate computed as the annual interest divided by the market value.

A bond sells for $962.24 and has a coupon rate of 7.90 percent. If the bond has 24 years until maturity, what is the yield to maturity of the bond?

Yield of maturity %?

Explanation / Answer

Let the face value of bond be $1000 Price of Bond = [C [1 - (1+r)^-t] / r] + [F / (1+r)^t] C - Coupon Payment - $50 r - YTM - 6.32% F - Face Value t - Years - 4 years Price = [50 * [1 - (1.0632^-4)/0.0632] + [1000 / 1.0632^4] = 171.9933 + 782.6005 = $954.59 The yield to maturity is the ? 1)discount rate that equates a bond's price with the present value of the bond's future cash flows. This is based on above calculations Let the face value of bond be $1000 Price of Bond = [C [1 - (1+r)^-t] / r] + [F / (1+r)^t] C - Coupon Payment - $79 r - YTM - ? F - Face Value t - Years - 24 years 962.24 = [79 * [1 - (1+r^-24)/r] + [1000 / 1+r^24] Since the Bond Price is less than face yield will be higher than coupon rate So at r = 9% = 766.8223 + 126.4049 = $893.23 At r = 8.5% = 798.2237 + 141.1518 = $939.38 At r = 8% = 831.7719 + 157.6993 = $989.47 So yield is between 8% to 8.5% YTM = 8% + [(962.24 - 989.47) / (939.38 - 989.47)] * (8.5 - 8) = 8% + (27.23 / 50.10) * 0.5 = 8.27%

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