Answer a.
Face Value = $500
Current Price = $630
Annual Coupon Rate = 13%
Annual Coupon = 13% * $500
Annual Coupon = $65
Time to Maturity = 11 years
Let Annual YTM be i%
$630 = $65 * PVIFA(i%, 11) + $500 * PVIF(i%, 11)
Using financial calculator:
N = 11
PV = -630
PMT = 65
FV = 500
I = 9.15%
Annual YTM = 9.15%
The yield to maturity (YTM) for the bond is 9.15%
Answer b.
The market value of the bond approaches its par value as the time to maturity declines. The yield-to-maturity approaches the coupon interest rate as the time to maturity declines.
The bond shown in the following table pays interest annually. (Click on the icon here in...
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