2) | Par/Face value | 1000 | ||||||
Annual Coupon rate | 0.1 | |||||||
Annual coupon | 100 | |||||||
Present Value = Future value/ ((1+r)^t) | ||||||||
where r is the yield to maturity that is 12% and t is the time period in years. | ||||||||
price of the bond = sum of present values of future cash flows | ||||||||
r | 0.12 | |||||||
mt | 1 | 2 | 3 | 4 | ||||
future cash flow | 100 | 100 | 100 | 1100 | ||||
present value | 89.28571 | 79.71939 | 71.17802 | 699.0699 | ||||
sum of present values | 939.25 | |||||||
Price of the bond | 939.25 | |||||||
The current yield = Annual cash inflow or coupon/Price of the bond | ||||||||
Current yield = 100/939.25 | ||||||||
Current yield = 10.6468% | ||||||||
d) 10.65%. | ||||||||
3) | Par/Face value | 1000 | ||||||
Annual Coupon rate | 0.09 | |||||||
Annual coupon | 90 | |||||||
Present Value = Future value/ ((1+r)^t) | ||||||||
where r is the yield to maturity and t is the time period in years. | ||||||||
price of the bond = sum of present values of future cash flows | ||||||||
Use excel to find r | ||||||||
r | 0.09 | |||||||
mt | 1 | 2 | 3 | 4 | 5 | |||
future cash flow | 90 | 90 | 90 | 90 | 1090 | |||
present value | 82.56881 | 75.7512 | 69.49651 | 63.75827 | 708.4252 | |||
sum of present values | 1000.00 | |||||||
Since the bond is selling at the par value, the yield to maturity is equal to the coupon rate. | ||||||||
The yield to maturity is 9%. | ||||||||
d) 9%. |
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