Question

ield to maturity The Salem Company bond currently sells for $95544, has a coupon interest rate of 9% and a $1000 par value, pays interest annually, and as 18 years to maturity Calculate the yield to maturity (YTM) on this bond Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond. The yield to maturity on this bond is %. (Round to three decimal places.) . Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond. (Select the best nswer below.) A. The market value of the bond approaches its par value as the time to maturity increases. The yield to maturity approaches the coupon interest rate as B. The market value of the bond approaches its par value as the time to maturity increases. The yield to maturity approaches the coupon interest rate as C. 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 D. 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 the time to maturity increases. the time to maturity declines. time to maturity increases. time to maturity declines.

Answer 1

Answer a.

Face Value = $1,000
Current Price = $955.44

Annual Coupon Rate = 9%
Annual Coupon = 9% * $1,000
Annual Coupon = $90

Time to Maturity = 18 years

Let Annual YTM be i%

$955.44 = $90 * PVIFA(i%, 18) + $1,000 * PVIF(i%, 18)

Using financial calculator:
N = 18
PV = -955.44
PMT = 90
FV = 1000

I = 9.527%

The yield to maturity on this bond is 9.527%

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.