Question

1. A year ago, an investor purchased bonds in General Electric at par. The bond had a coupon of 8% at the date of issue. The bond declined over the course of the year to 94. What is the current yield on the bond? Answer is 8.51%

2. XYZ Inc. has some bonds outstanding, currently with 10 years remaining to maturity. The coupon rate is 8%, and the interest is paid semi-annually. The face value of the bonds is $100. What is the present value of the interest coupon stream if the yield to maturity is 10%? Answer is 87.53

show work for both preferably for financial calculator please

Answer 1

Answer:

1. What is the current yield on the bond?

Annual coupon = 8%

Current bond price = $ 94

Face value of Bond = $100

Theretofore,

      Current yield = (8 ÷ 94)*100

                     = 8.51%

2. What is the present value of the interest coupon stream if the yield to maturity is 10%?

period	Events	cash flows	Annuity factor @ 5%	Value of bond( present value)
I	II	I11	IV	V=III*IV
1-20	Coupon	$100*4% = $ 4	12.4622	$ 49.84
20	Redemption	$100	0.3769	$ 37.69
Value of Bond				$87.53

          Present value of the interest coupon stream = $49.84

          Present value of the Redemption value       = $ 37.69

          Total value of bond                                          =$ 49.84 + $37.69 = $87.53

Note:

When interest is paid semiannually convert the entire problem data into periods and solve it. i.e.,

Period= 20 (10 year)

Coupon rate = 4% per period (8% per annual)

Yield to maturity = 5% per period (10% per annual)

How to compute annuity factor (@5%)

Annuity factor is sum total of present value factor for N years

periods	Present value factor @ 5%
1	0.9524
2	0.9070
3	0.8638
4	0.8227
5	0.7835
6	0.7462
7	0.7107
8	0.6768
9	0.6446
10	0.6139
11	0.5847
12	0.5568
13	0.5303
14	0.5051
15	0.4810
16	0.4581
17	0.4363
18	0.4155
19	0.3957
20	0.3769
Annuityfactor	12.4622