Question

A 7% semiannual coupon bond matures in 6 years. The bond has a face value of $1,000 and a current yield of 7.7608%.

What is the bond's price? Do not round intermediate calculations. Round your answer to the nearest cent.


What is the bond's YTM? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

(a)-The Bond Price

The Current Yield on the Bond = Annual Coupon amount / Price of the Bond

0.077608 = ($1,000 x 7.00%) / Price of the Bond

0.077608 = $70.00 / Price of the Bond

Therefore, the Price of the Bond = $70.00 / 0.077608

Price of the Bond = $901.97

(b)-The Yield to maturity of (YTM) of the Bond

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• 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
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 7.00% x ½]	PMT	35
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [6 Years x 2]	N	12
Bond Price [-$901.97]	PV	-901.97

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 semi-annual yield to maturity (YTM) on the bond = 4.58%.

The semi-annual Yield to maturity = 4.58%.

Therefore, the annual Yield to Maturity of the Bond = 9.16% [4.58% x 2]

“Hence, the Yield to maturity of (YTM) of the Bond will be 9.16%”