In: Finance
Comco Inc issued bonds that have a 8.5% coupon rate, payable semiannually. The bonds mature in 12 years, have a $1,000 face value and a 12% yield to maturity.
1.. What is the price of the bonds?
2. Exactly two years later, you observe the bonds trading at $925, what is the yield to maturity?
a.Information provided:
Face value= future value= $1,000
Time= 12 years*2= 24 semi-annual periods
Yield to maturity= 12%/2= 6% per semi-annual period
Coupon rate= 8.5%/2= 4.25% per semi-annual period
Coupon payment= 0.0425*1,000= $42.50
The price of the bond is calculated by computing the present value.
Enter the below in a financial calculator to compute the present value:
FV= 1,000
N= 24
I/Y= 6
PMT= 42.50
Press the CPT key and PV to compute the present value.
The value obtained is 780.3687.
Therefore, the current price of the bond is $780.37.
b. Information provided:
Face value= future value= $1,000
Time= 14 years*2= 28 semi-annual periods
Coupon rate= 8.5%/2= 4.25% per semi-annual period
Coupon payment= 0.0425*1,000= $42.50
Current price= present value= $925
Enter the below in a financial calculator to compute the yield to maturity:
FV= 1,000
PV= -925
N= 28
PMT= 42.50
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 4.7392.
Therefore, the yield to maturity is 4.7392%*2= 9.4785% 9.48%.
In case of any query, kindly comment on the solution