Question

Charlotte's Clothing issued a 4 percent bond wth a maturity date of 13 years. Four years have passed and the bond is seling for $865. Assume that the bond gpays interest annually, a What is the curent yield? Round your answer to two deomal places. b What is the vield to maturity? Lse Appendix B and Appendix D to answer the question. Round your answer to the nearest whole number c If four years later the yield to maturity is 6 percent, what wi be the price of the bond? Use Appendix B and Appendix D to answer the question. Round your answer to the neares dollar

Answer 1

Part A:

Current Yield = Coupon amount / Price

= $ 40 / 865

= 0.0462 i.e 4.62%

Part B:

YTM is the Rate at which PV of cash Inflows are equal to Price.

Year	CF	PVF @5%	Disc CF	PVF @6%	Disc CF
0	$ -865.00	1.0000	$ -865.00	1.0000	$ -865.00
1	$      40.00	0.9524	$    38.10	0.9434	$    37.74
2	$      40.00	0.9070	$    36.28	0.8900	$    35.60
3	$      40.00	0.8638	$    34.55	0.8396	$    33.58
4	$      40.00	0.8227	$    32.91	0.7921	$    31.68
5	$      40.00	0.7835	$    31.34	0.7473	$    29.89
6	$      40.00	0.7462	$    29.85	0.7050	$    28.20
7	$      40.00	0.7107	$    28.43	0.6651	$    26.60
8	$      40.00	0.6768	$    27.07	0.6274	$    25.10
9	$      40.00	0.6446	$    25.78	0.5919	$    23.68
10	$      40.00	0.6139	$    24.56	0.5584	$    22.34
11	$      40.00	0.5847	$    23.39	0.5268	$    21.07
12	$      40.00	0.5568	$    22.27	0.4970	$    19.88
13	$      40.00	0.5303	$    21.21	0.4688	$    18.75
13	$ 1,000.00	0.5303	$ 530.32	0.4688	$ 468.84
NPV			$    41.06		$   -42.05

YTM = rat at which least +ve NPV + [ NPV at that Rate / Change In NPV due to 1% inc in Rate ] * 1%

= 5% + [ 41.06 /83.12 ] * 1%

= 5% + 0.49%

= 5.49%

Part C:

Price of Bond = PV of CFs from it

Year	CF	PVF @6%	Disc CF
1	$      40.00	0.9434	$    37.74
2	$      40.00	0.8900	$    35.60
3	$      40.00	0.8396	$    33.58
4	$      40.00	0.7921	$    31.68
5	$      40.00	0.7473	$    29.89
6	$      40.00	0.7050	$    28.20
7	$      40.00	0.6651	$    26.60
8	$      40.00	0.6274	$    25.10
9	$      40.00	0.5919	$    23.68
10	$      40.00	0.5584	$    22.34
11	$      40.00	0.5268	$    21.07
12	$      40.00	0.4970	$    19.88
13	$      40.00	0.4688	$    18.75
13	$ 1,000.00	0.4688	$ 468.84
Price of Bond			$ 822.95

Pls comment, if any further assistance is required.