Question

The Salem Company bond currently sells for $956.79 has a coupon interest rate of 8 % and a $1000 par value, pays interest annually, and has 12 years to maturity.

a. Calculate the yield to maturity (YTM ) on this bond.

b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond.

Answer 1

Par Vale = 1000
Price = 956.79
Maturity = 12 years
Coupon = 8%*1000 =80
a) Using financial Calculator
N = 12; PMT = 80; PV = -956.79, FV = 1000; CPT I/Y
YTM = 8.59%

b) If the Coupon rate is more than YTM then Market Value of Bond is more than Par value and If Coupon Rate is less than YTM Market value is less than Par Value.

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