Question

In: Finance

Yield to maturity: The bond shown in the following table pays interest annually. Par value Coupon...

Yield to maturity:

The bond shown in the following table pays interest

annually.

Par value

Coupon interest rate

Years to maturity

Current value

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$100100

77%

1010

$5050

a. Calculate the yield to maturity

(YTM)

for the bond.

b. What relationship exists between the coupon interest rate and yield to maturity and the par value and market value of a bond? Explain.

a. The yield to maturity

(YTM)

for the bond is

nothing %.

(Round to two decimal places.)

Solutions

Expert Solution

(a)-Yield to Maturity (YTM) of the Bond

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)


Variables	Financial Calculator Keys	Figure

Face Value [-$100]	FV	100
Coupon Amount [$100 x 7.00%]	PMT	7
Market Interest Rate or Required Rate of Return	1/Y	?
Time to Maturity [10 Years]	N	10
Bond Price [-$50]	PV	-50

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 18.21%

“Therefore, the yield to maturity (YTM) on the bond will be 18.21%”

(b)- Relationship between the coupon interest rate and yield to maturity and the par value and market value of a bond

-If the coupon rate of a bond is above the current market interest rates, a bond will sell at Premium.

-When pricing bonds, there is an inverse relationship between the Market price and market interest rate or Yield to Maturity of the Bond

-The Market Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

-If the Market Interest Rate Increases, then the discounting rate will be higher & the discounting factor will be lower and it will result’s in the Market Price of the Bond to be lower.

-If the Market Interest Rate Decreases, then the discounting rate will be lower & the discounting factor will be higher and it will result’s in the Market Price of the Bond to be higher.

- If the Yield to Maturity [YTM] is greater than the coupon rate, then the selling price of the bond will be less than its par value, since the bonds are selling at discount

- If the Yield to Maturity [YTM] is less than the coupon rate, then the selling price of the bond will be more than its par value, since the bonds are selling at premium.

jeff jeffy answered 2 weeks ago

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