Question

2.   A bond has 10 years to maturity, a 7.8% annual coupon rate, and sells for $985. Assume coupon payments are       made semi-annually.                                                                                                                           (3 points)

      a.   What is the current yield for this bond?

      b.   What is the YTM?

      c.   Assume that the YTM remains constant for the next 6 years. What will the price be 6 years from today?

(Worked needed)

Answer 1

a

current yield = coupon rate*par value/current price

Current yield%=(7.8/100)*1000/985

Current yield% = 7.92

b

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

985 =∑ [(7.8*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^10x2

k=1

YTM% = 8.02

c

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =4x2

985 =∑ [(7.8*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^4x2

k=1

YTM% = 8.25