Question

: A 5-year 7% annual coupon bond yields 6%. Draw the picture for the face value of $10,000. |----------|----------|----------|----------|----------|----------|

The price of the bond P0 = $ ……………… would be quoted in the paper as ………………

The current yield is …………………%.

The yield to maturity is ………………………%

Answer 1

1) Timeline graph for the given bond: Year-O Year-1 Year-2 Year-3 Year-4 Year-5 $10,421.24 $700 $700 $700 $700 $10,700 [In year-5, coupon payment + Maturity amount = $700 + $10,000 = $10,700] NOTE: In year-o, it is positive because firm will receive cash from issuing bonds; For year-1 thru 5, they are negative because firm has to pay cash to bondholders. Workings: 6% Aannual Yield to Maturity, RATE # of years to maturity, NPER Annual coupons payments, PMT Bond's Maturity Value at the end, FV Annual coupon type, TYPE Bond's issue price today $700 ($10,000 x 7%] $10,000 [Par value recievable at the end] 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. $10,421.24 [Ref: NOTE]

EXCEL SCREENSHOT: 6% Bond's issue price today is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=6%; nper=5; pmt=-700; fv=-10000; type=0; Here, pmt & fv are negative as they denote cash inflow; type=0 as coupons are paid at the end of each period only. А B C D E F G H I J K 1 Aannual Yield to Maturity, RATE 2 # of years to maturity, NPER 3 Annual coupons payments, PMT =10000*7% ($10,000 x 7%] 4 Bond's Maturity Value at the end, FV $10,000 [Par value recievable at the end] 5 Annual coupon type, TYPE 0 = 0 if coupons paid at the end of each period; 1 if coupons paid at the beginning of each period. 6 Bond's issue price today =PV(B1,B2,-B3,-B4,B5) [Ref: NOTE] 5 2) The price of the bond PO = $10421.24 would be quoted in the paper as 104.21. The current yield 6.72% [Annual coupon payment / Bond's current price = $700 / $10421.24 = 0.0672 = 6.72%] The yield to maturity is 6%.