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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PRICE AND YIELD A 7% semiannual coupon bond matures in 4 years. The bond has a face value of $1,000 and a current yield of 7.5401%. What are the bond’s price and YTM?(Hint: Refer to footnote 6 for the definition of the yield and to Table 7.1)

Summary Introduction

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

Introduction:

Yield to Maturity (YTM) refers to the total return expected on the bond till it matures. Bond price is the face value of the bond at which it is sold to the investors once the bond is issued.

Explanation

Given information:

Semiannual coupon rate is 7% (3.5% annually), current yield (semi-annually) is 7.5401%, par value of bond is $1,000, and maturity is after 4 years.

The formula to compute current yield:

Currentyeild=AnnualcouponpaymentCurrentprice

The formula to calculate the annual coupon payment is as follows:

PMT=Coupon rate×Par value

Note: Using the current yield, the current price can be computed. Substitute 7.5401% for the current yield and $70 for the annual coupon payment.

Compute the annual coupon payment (for calculation of current price):

PMT=Coupon rate×Par value=0.07×$1,000=$70

Hence, the PMT is $70

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