Mr. Joey bought a bond issued by City bank which has a $1,000 face value and pays semi- annual interest will mature in 9 years. The return on similar-risk investments is 12 percent and the bond pays $54 interest per year.

Calculate the current market value (price) of the bond & what will be the yield to maturity?

Solutions

Expert Solution

Face value of bond = $1000

interest per year = $54

Semiannual interest = Annual interest /half yearly coupons in year

= 54/2 = 27

Years to maturity =9

Semiannual years to maturity (n) = 9*2

= 18

Return on similar risky investment or required return = 12%

Semiannual required return (i) = 12%/2

= 6%

We will calculate current market price using bond price formula:

Bond price formula = Coupon amount * (1 - (1/(1+i)^n)/i + face value/(1+i)^n

= (27*(1-(1/(1+6%)^18))/6%) + (1000/(1+6%)^18)

= $642.69

So current bond price is $642.69

Yield to maturity is that rate at which Present value of coupons and present value of Face value is equal to current price of bond. It is also the required rate of return on this bond.

As required rate on this bond is 12%, Yield to maturity of this bond is 12%

So current bond price is $642.69

Yield to maturity of this bond is 12%

Nabeel answered 1 year ago

Next > < Previous

Related Solutions

A 20-year bond with a face value of $1,000 will mature in 8 years. The bond pays semi-annual coupons at 5% p.a

A 20-year bond with a face value of $1,000 will mature in 8 years. The bond pays semi-annual coupons at 5% p.a. compounding half-yearly. Mia wants to purchase the bond at a price which gives her a yield to maturity of 6% p.a. compounding half-yearly. Calculate the maximum price Mia should pay for the bond. (Round your answer to the nearest cent).

12 percent bond, face value of $1,000 , life of 5 years. return required by the...

12 percent bond, face value of $1,000 , life of 5 years. return required by the market is 10 percent coupon payments are made once annually. Figure out price of bond at time of flotation on the market. end of year three, the market requires a return of 8 percent instead of 10 percent find the market price at this time. What is the yield of a two year zero coupon bond, when the market price is $970 and a...

A semi-annual corporate bond has a coupon rate of 9 percent per year. The face value....

A semi-annual corporate bond has a coupon rate of 9 percent per year. The face value. is $1,000. The market interest rate (yield to maturity) for this bond today is 10.5 percent. This bond has 25 years. before maturity. What is the price of this bond today? (5 points). b. What is the current yield for this bond? (3 points) c. Why is the current yield different from the current market rate of this bond? (2 points)

A semi-annual corporate bond has a coupon rate of 9 percent per year. The face value...

A semi-annual corporate bond has a coupon rate of 9 percent per year. The face value is $1,000. The market interest rate (yield to maturity) for this bond today is 10.5 percent. This bond has 25 years before maturity. a. What is the price of this bond today? b. What is the current yield for this bond? c. Why is the current yield different from the current market rate of this bond? PLEASE SHOW HOW YOU WOULD GET ANSWERS ON...

Carraway Seed Company is issuing a $1,000 par value bond that pays 9 percent annual interest...

Carraway Seed Company is issuing a $1,000 par value bond that pays 9 percent annual interest and matures in 11 years. Investors are willing to pay $975 for the bond. Flotation costs will be 14 percent of market value. The company is in a 25 percent tax bracket. What will be the firm's after-tax cost of debt on thebond?

Carraway Seed Company is issuing a $1,000 par value bond that pays 11 percent annual interest and matures in 9 years

Carraway Seed Company is issuing a $1,000 par value bond that pays 11 percent annual interest and matures in 9 years. Investors are willing to pay $985 or the bond. Flotation costs will be 11 percent of market value. The company is in a 25 percent tax bracket. What will be the? firm's after-tax cost of debt on the? bond? The? firm's after-tax cost of debt on the bond will be nothing?%. (Round to two decimal places.)

A bond with a face value of $1,000 matures in 12 years and has a 9...

A bond with a face value of $1,000 matures in 12 years and has a 9 percent semiannual coupon. The bond has a nominal yield to maturity of 6.85%, and it can be called in 4 years at a call price of $1,045. Assume equilibrium, which of the following statement is correct? (hint: what kind of bond is this?) Select one: a. The bond is currently traded at a discount. b. The expected current yield will decrease. c. All else...

9. A bond matures in 12 years and pays a 6 percent annual coupon. The bond...

9. A bond matures in 12 years and pays a 6 percent annual coupon. The bond has a face value of $1,000 and currently sells for $890. What is the bond’s current yield and yield to maturity? 10. The face value for Karen’s Limited bonds is $100,000 and has a 2 percent annual coupon. The 2 percent annual coupon bonds matures in 2022, and it is now 2012. Interest on these bonds is paid annually on December 31 of each...

A 9-year bond pays interest of $26.90 semiannually, has a face value of $1,000, and is...

A 9-year bond pays interest of $26.90 semiannually, has a face value of $1,000, and is selling for $ 795.07. What are its annual coupon rate and yield to maturity

A 7 percent coupon bond has a face value of $1,000 and pays interest annually. The...

A 7 percent coupon bond has a face value of $1,000 and pays interest annually. The current yield is 7.3 percent. What is the current price of this bond?

Subjects