a)
To determine: The relationship that exists between the yield to maturity and the
Introduction:
A bond refers to the debt securities issued by the governments or corporations for raising capital. The borrower does not return the face value until maturity. However, the investor receives the coupons every year until the date of maturity.
If the bond sells at a steep discount during the issue and does not make any coupon payments during its life, then the bond is a zero coupon bond.
Yields refer to the return on the investment made by an investor. A bond yield refers to the return earned by the investor on the bond if he or she holds the bond until the bond matures.
Bond price refers to the price at which the bond the investors buy and sell in the market. It is the sum of present value of the lump sum amount received at the end of the maturity and the coupon payments.
b)
To determine: The reason why bonds sell at a premium or discount and the relationship between the yield to maturity and the coupon rate of premium, discount, and par bonds.
Introduction:
A bond refers to the debt securities issued by the governments or corporations for raising capital. The borrower does not return the face value until maturity. However, the investor receives the coupons every year until the date of maturity.
If the bond sells at a steep discount during the issue and does not make any coupon payments during its life, then the bond is a zero coupon bond.
Yields refer to the return on the investment made by an investor. A bond yield refers to the return earned by the investor on the bond if he or she holds the bond until the bond matures.
c)
To determine: The relationship between the yield to maturity and the current yield of par, discount, and premium bonds.
Introduction:
The current yield of the bond is the annual coupon of the bond divided by the price of the bond.
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F371 Essn. of Corporate Finance >C< By Ross MCG Custom ISBN 9781259320576
- Bonds. What is the relationship between the price of a bond and its YTM? All else being the same, which has more interest rate risk, a long-term bond or a short-term bond? What about a low coupon bond compared to a high coupon bond? What about a long-term, high coupon compared to a short-term, low coupon bond? Why?arrow_forwardUnder what situation might a bond discount arise when issuing bonds? Select one: a. The coupon rate is less than the effective or yield rate. b. The effective or yield rate is less than the coupon rate. c. The coupon rate is less than the cash rate of interest. d. The effective or yield rate is less than the market rate of interest.arrow_forward
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