a. Springfield Nuclear Energy Inc. bonds are currently trading at $1,775.16. The bonds have a face value of $1,000, a coupon rate of 10.5% with coupons paid annually, and they mature in 25 years. What is the yield to maturity of the bonds?
b. Consider an annual coupon bond with a face value of $100,12 years to maturity, and a price of $76. The coupon rate on the bond is 6%. If you can reinvest coupons at a rate of 5% per annum, then how much money do you have if you hold the bond to maturity?
(a) Bond Price = $ 1775.16, Face Value = $ 1000, Coupon Rate = 10.5 % payable annually, Tenure = 25 years
Annual Coupon = 0.105 x 1000 = $ 105
Let the yield to maturity be Y
Therefore, 1775.16 = 105 x (1/Y) x [1-{1/(1+Y)^(25)}] + 1000 / (1+Y)^(25)
Using EXCEL's Goal Seek Function/ hit and trial method/ a financial calculator to solve the above equation, we get:
Y = 0.050000344 or 5.0000344 % ~ 5 %
NOTE: Please raise a separate query for the solution to second unrelated question, as one query is restricted to the solution of only one complete question with up to four sub-parts.
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