Preston Corporation has a bond outstanding with an annual interest payment of $9

Question

Preston Corporation has a bond outstanding with an annual interest payment of $90, a market price of $1,280, and a maturity date in 7 years. Assume the par value of the bond is $1,000. Find the following: (Use the approximation formula to compute the approximate yield to maturity and use the calculator method to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

a. Coupon rate %

b. Current yield %

c-1. Approximate yield to maturity %

c-2. Exact yield to maturity %

Explanation / Answer

Solution: Computation of the following

a.
Coupon rate = Annual interest payment / Par value
Coupon rate = 90 / 1000
Coupon rate = 0.09
Coupon rate =9.00%

b.
Current rate = Annual interest payment / Current price
Current rate = 90 / 1280
Current rate = 0.07
Current rate = 7.00%

C. YTM = Yeild to maturity
YTM = (Annual interest payment [Par value - Current value]/(years to maturity) ) / [ (Par value Current value) / 2]

YTM = [90 (1000 - 1280)/10] / [(1000 1280)/2]

YTM = [90 (-280/10)] / [(1000 1280)/2]

YTM = (90-28)/1140

YTM = 0.0532

YTM = 5.32%

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