Compare and contrast current yield and yield to maturity.
Answer: The current yield is a measure of the one-year return on a bond if purchased today. The current yield is calculated by taking a bond's annual coupon payment and dividing by its market price. Yield to maturity measures the return on a bond if it is held to maturity. The yield to maturity is that discount rate that would make the present value of the expected future cash flows exactly equal to the market price at time of calculation. In an efficient market, the yield to maturity will reflect the market rate of interest and required return of bondholders.
BCD's $1,000 par value bonds currently sell for $798.50. The coupon rate is 10%, paid semiannually. If the bonds have five years before maturity, what is the yield to maturity or expected rate of return?
Answer: N=10, PV=-798.50, PMT=50, FV=1000, solve for i=8.00 semi-annual rate, 8.00% × 2 = 16%
If you are willing to pay $1,392.05 for a 15-year, $1,000 par value bond that pays 10% interest semiannually, what is your expected rate of return?
Answer: N=30, PV=-1,392.05, PMT=50, FV=1000, solve for i=2.99 semi-annual rate, 2.99 % × 2 = 6%
DAH, Inc. has issued a 12% bond that is to mature in nine years. The bond had a $1,000 par value, and interest is due to be paid semiannually. If your required rate of return is 10%, what price would you be willing to pay for the bond?
Answer:
N=18, i=5, PMT=60, FV=1000, solve for PV=.-1116.90
Price = $1,116.90
The market price of a 20-year, $1,000 bond that pays 9% interest semiannually is $774.31. What is the bond's yield to maturity?
Answer: N=40, PV=-774.31, PMT=45, FV=1000, solve for i=6.00 semi-annual rate, 6.00 × 2 = 6%
Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value. The interest coupon rate is 8%, and the required rate of return is 10%. Interest is paid annually.
Answer:
N=13, i=5, PMT=80, FV=1000, solve for PV=.-1116.90
Price = $1,116.90
Garvin, Inc.'s bonds have a par value of $1,000. The bonds pay semiannual interest of $40 and mature in five years.
a. How much would you pay for Garvin bonds if your required rate of return is 10%?
b. How much would you pay if your required rate of return is 8%?
Answer:
a. N=10, i=5, PMT=40, FV=1000, solve for PV=-922.78
Price = $922.78
b. Price = $1,000
Given the following information, determine the market value of EAO Company bonds.
Par value $1,000
Coupon rate 10%
Years to maturity 6
Market rate 8%
Interest paid semiannually
Answer:
N=12, i=4, PMT=50, FV=1000, solve for PV=-1093.85
Price = $1,093.85
