Question

Which of the following statements is most correct with regards to a 10 year bond with a 9% annual coupon rate and a YTM of 8%? a) The bond is selling at a discount. b) The bond’s current yield is greater than 9 percent. c) If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =10

Bond Price =∑ [(9*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^10

k=1

Bond Price = 1067.1

a is incorrect, bond is at a premium to par

current yield = coupon/ price = 90/1067.1 = 8.4% ... b is false

BOnd price in one year:

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =9

Bond Price =∑ [(9*1000/100)/(1 + 8/100)^k]     +   1000/(1 + 8/100)^9

k=1

Bond Price = 1062.47

c is true