Question

Yield to maturity The Salem Company bond currently sells for $1,046.92, has a coupon interest rate of 14% and a $1000 par value, pays interest annually, and has 15 year to maturity.

1. Calculate the yield to maturity (YTM) on this bond.
2. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond.

Answer 1

a

K = N

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

k=1

K =15

1046.92 =∑ [(14*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^15

k=1

YTM = 13.264%

b

If YTM is less than coupon rate price of bond is less than par value and vice versa. YTM is used to discount all future cash flows to present. When it is lower than coupon rate , the sum of discounted value of cash flows are higher than par value and vice versa