   Chapter 20.II, Problem 23RE Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447

Solutions

Chapter
Section Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447
Textbook Problem

Calculate the annual interest and current yield of the following bonds. Company Coupon Rate Annual Interest Market Price Current Yield 23. Blockbuster 7.50 125.25

To determine

To calculate: The annual interest and current yield of a Blockbuster bond with a coupon rate of 7.50% currently selling at market price of 125.25.

Explanation

Given Information:

A Blockbuster bond with a coupon rate of 7.50% and the currently selling at market price is 125.25.

Formula used:

Steps to calculate the current yield of a bond:

Step 1: Calculate the annual interest and current price of the bond with the formula,

Annualinterest=Parvalue×Couponrate

Step 2: Divide the annual interest of the bond by current market price as,

Currentyield=AnnualinterestCurrentmarketprice

Step 3: Convert the final answer to percent, rounded to nearest tenth.

Calculation:

A Blockbuster bond with a coupon rate of 7.50%, which can be denoted in decimal as,

7.50100=0.075

The annual interest can be calculated as,

Annualinterest=Parvalue×Couponrate=1,000×0.075=75

Thus, annual interest is 75.

The current market price can be calculated as a percent of the par value of \$1,000,

Pricepercent=125

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