Yeld to maturity The Salem Company bond are ty sells for S695 90, has a coupon n
ID: 2615610 • Letter: Y
Question
Yeld to maturity The Salem Company bond are ty sells for S695 90, has a coupon ntere trate of 7% and a S10Opar value pays nterest an ay and has 18years to matty . Calculate the yield to maturity (YTM) on this bond b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond a.The yield to maturity on this bond is % (Round to tree decmal places.) b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond (Select the best answer below.) ? A. The market value of the bond approaches its par value asmetme ,o matty deci es The yield to maturity approact î the coupon itee trate as ne me to math names O B. The market value of the bond approaches its par value as the time to maturity decines The yield to maturity approaches the coupon interest rate as the time to maturity decines ?· The market value of the bond approaches its par vaue aste tre to maturty increases The yed to maturty approaches re coupon interest rate as the time to matuty released D. The market value of the bond approaches its par value as the time to maturity increases The yield to maturty approaches the coupon interest rate as the tme to maturity dedinesExplanation / Answer
1. Coupon rate = 7%, Par Value = 1000, Time to maturity = 18, Price= 695.90
Coupon = 7% * 1000 = 70
Price of Bond = Coupont/(1+ YTM)t + Face Value/(1+YTM)t
695.90 = 70/(1+ YTM)18 + 695.90/(1+YTM)t
YTM = 10.925%
2. Option a ) Correct answer
Market value of Bond approaches to par value if time to maturity declines. The yield to maturity approaches coupon interest rate as the time to maturity increases
Because as time to maturity increases present value of par value decreases and this decrease is more than the increase in discounted extra coupon payments.
YTM approaches coupon rate as maturity increases because to obtain the YTM close to coupon number of years of discounting has to increase.
Best of Luck. God Bless
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