Question

A General Power bond carries a coupon rate of 9.2%, has 9 years until maturity, and sells at a yield to maturity of 8.2%. (Assume annual interest payments.)

a. What interest payments do bondholders receive each year?

b. At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What will happen to the bond price if the yield to maturity falls to 7.2%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

d. If the yield to maturity falls to 7.2%, will the current yield be less, or more, than the yield to maturity?

• More

• Less

Answer 1

a

interest payment = coupon rate *par value = 0.092*1000 = 92

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =9

Bond Price =∑ [(9.2*1000/100)/(1 + 8.2/100)^k]     +   1000/(1 + 8.2/100)^9

k=1

Bond Price = 1061.95

c

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =9

Bond Price =∑ [(9.2*1000/100)/(1 + 7.2/100)^k]     +   1000/(1 + 7.2/100)^9

k=1

Bond Price = 1129.2

Change in price = 1129.2-1061.95=67.25, "Rise by 67.25"

d

current yield = coupon rate*par value/current price

Current yield%=(9.2/100)*1000/1129.2

Current yield% = 8.15

Current yield is more than YTM