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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PRICE AND YIELD An 8% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.21%, What are the bond’s price and YTM? (Hint: Refer to Footnote 7 for the definition of the current yield and to table 7.1.)

Summary Introduction

To calculate: Price of bond and yield to maturity (YTM).

Yield to Maturity: It refers to the rate of interest earned till the maturity of the bond by the bond holder.

Explanation

Given,

Semiannual coupon rate is 8%.

Current yield is 8.21%.

Par value of bond is $1,000.

Maturity is after 5 years.

Formula to calculate current yield,

Currentyeild=AnnualcouponpaymentCurrentprice

Substitute 8.21% for current yield and $80 for annual coupon payment.

8.21%=$80CurrentpriceCurrentprice=$808.21%=$974.42

Yield to maturity (YTM) can be calculated through value of bond

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