Question

Carries Clothes, Inc. has four-year bond outstanding that pays $50 annually. The face value of each bond is $1,000, and the bond sells for $910 What the bond's coupon rate Round your answer to two decimal places. b. What the current yeld Round your answer to two decimal places, What the yeld to matur e Abendix H and A to answer the question. Round your answer to the nearest whole number

Answer 1

(a)-Bond’s coupon rate

The Bond’s coupon rate = [Annual coupon amount / Par Value] x 100

= [$50 / $1,000] x 100

= 5.00%

(b)-The Current Yield on the Bond

Bond’s Current Yield = [Annual Coupon Amount / Bond’s Price] x 100

= [$50 / $910] x 100

= 5.49%

(c)-The Yield to maturity (YTM) of the Bond

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 5.00%]	PMT	50
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [4 Years]	N	4
Bond Price [-$910]	PV	-910

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity (YTM) on the bond = 7.70%.

“Hence, the Yield to maturity of (YTM) of the Bond will be 7.70%”