Question

1.

1. One of the England’s largest corporation, who own the hair salon, “British Hairways” just expanded operations into the United States. At present, the firm has a 30 year, $10,000 par value bond outstanding, with a coupon rate of 4.3% percent paid semiannually and 15 years to maturity. The yield to maturity on this bond is 5.2 percent.

1. What is the current value of the bond?  

2. Once you have calculated the Present Value or the current price of the bond, what would be the Current Yield on this bond?

3. Is it selling at a discount, par, or premium?

4. What is the difference between the concepts of Yield to Maturity, Current Yield, and Coupon Rate? Please compare the three rate

Further Instructions:

Please include a time line, filling in or including all given and to be solved variables which are components of the bond, such as N, Semi-Annual Time Periods (as long as you indicate semi-annual is the frequency), I/Y, Coupon PMT, FV (Face Value at Maturity or M), (where the Present Value equals the current bond price) PV is variable to be solved for, so PV?

Answer 1

Solution 1)

Solution 2)

Solution 3) Since the price of the bond is less than the par value, hence, the bond is trading at discount.

Also, the YTM of the bond is greater than the coupon rate, hence, the bond is trading at discount.

Solution 4) Coupon Rate = 4.3%

Yield to maturity (YTM) = 5.2%

Current Yield = 4.98%

a. The coupon rate is defined as the interest rate that the issuer agrees to pay to bondholders each year until the maturity date. The annual amount of interest payments made is called the coupon.

Coupon amount = Coupon rate*Par Value of the bond

b. The current yield is defined as the annual coupon divided by the bond’s price and is expressed as a percentage.

In case of current yield:

i) Only Considers coupon interest

ii) Capital Gains/Losses not taken into account

iii) No consideration for reinvestment income

c. Yield to maturity is the internal rate of return on a bond’s expected cash flows. Thus, it is the expected annual rate of return an investor will earn if the bond is held to maturity. It considers both coupon income and capital gain/loss if held to maturity. Also, it considers the timing of the cash flows.