Question

Q1. Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 18 years, have a face value of $1,000, and a yield to maturity of 7%. What is the price of the bonds? Round your answer to the nearest cent.

Q2. The Brownstone Corporation's bonds have 4 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%.

1. What is the yield to maturity at a current market price of $889? Round your answer to two decimal places.
2. What is the yield to maturity at a current market price of $1,113? Round your answer to two decimal places.

Answer 1

1.Information provided:

Face value= future value= $1,000

Coupon rate= 10%/2= 5%

Coupon payment= 0.05*1,000= $50

Time= 18 years*2= 36 semi-annual periods

Yield to maturity= 7%/2= 3.50% per semi-annual period

The price of the bond is calculated by computing the present value of the bond.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 50

N= 36

I/Y= 3.5

Press the CPT key and PV to compute the present value.

The value obtained is 1,304.36.

Therefore, the bond’s price is $1,304.36

2.a.Information provided:

Par value= future value= $1,000

Current price= present value= $889

Time= 4 years

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -889

N= 4

PMT= 100

Press the CPT key and I/y to compute the yield to maturity.

The value obtained is 13.79.

Therefore, the yield to maturity is 13.79%.

b. Information provided:

Par value= future value= $1,000

Current price= present value= $1,113

Time= 4 years

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -1,113

N= 4

PMT= 100

Press the CPT key and I/y to compute the yield to maturity.

The value obtained is 6.69.

Therefore, the yield to maturity is 6.69%.

In case of any query, kindly comment on the solution.