Question

Hey guys, can somebody explain to me how get this

The value of a corporate bond can be derivded by calculating the present value of the interest payment and the present value of the face value at the bond's

1- Current Yield

2- Coupon Rate

3- Required rate of return

4- Effective rate

can you kindly elaborate on the answer. thanks

Answer 1

The value of a corporate bond can be derived by calculating the present value of the interest payment and the present value of the face value at the bond's effective rate.

Effective Rate

Effective interest rate is the interest rate that is actually earned or paid on an investment due to the result of compounding over a given time period. It is also called as the yield to maturity.

Current Yield

Current yield is the annual rate of return based on annual cash payment and the current market price of the bond. It is calculated by dividing the annual coupon payment by the current bond price.

Coupon Rate

Coupon rate is the rate of interest paid by bond issuers on the bond’s face value. It is the annual interest income paid to bond holders.

Required Rate of return

Required rate of return is the minimum return expected by an investor from an investment.

The price of a bond can be calculated using the following formula:

Bond price= Annual cash flow/(1+YTM)^n……..+ Annual cash flow+Future Value/(1+YTM)^n

Where:

n=time period

YTM= Yield to maturity

Annual cash flow=coupon payments

I hope that was useful :)