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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

YIELD TO MATURITY AND FUTURE PRICE A bond has a $1,000 par value, 12 years to maturity, and an 8% annual coupon and sells for $980.

  1. a. What is its yield to maturity (YTM)?
  2. b. Assume that the yield to maturity remains constant for the next three years. What will the price be 3 years from today?

a.

Summary Introduction

To determine: The Yield to maturity (YTM).

Yield to Maturity (YTM):

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

Explanation

Given,

The coupon rate is 8%.

Selling price (value of the bond) is $980.

Par value of the bond is $1,000.

Maturity is after 12 years.

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

The formula to calculate the present value of the bond,

Bond'svalue=t=1NINT(1+rd<

b.

Summary Introduction

To determine: The value of a bond after 3 years if yield to maturity does not change.

Present value:

The present value is the current value by which the future value of the annuity is determined. The calculation of the future value depends on the present value, which is calculated at a discounted rate.

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