Corporate Bond Problems Please show your work Current Yield 1. Steve is looking

Question

Corporate Bond Problems

Please show your work

Current Yield

1.         Steve is looking at a bond that pays a 5.75% coupon and is currently selling for $1052.50. What is the current yield?

2.         Tina is looking at a bond that has a coupon of 6 3/8 and is currently selling for $867.50. What is the current yield?

3.         Urban is looking at a bond with a coupon of 5 1/2%. Market interest rates have dropped since the bond was issued. He would be willing to invest if he could earn a current yield of 4

Explanation / Answer

1 Coupon amount = 57.5 Current Market Price = 1052.5 Current Yield = Coupon amount/Current Market Price = 5.463182898 2 Coupon rate = 6% Coupon amount = 60 Current Yield at the time of purchase = 7% 7% = Coupon amount/Current Market Price 7% = 60/Current Market Price Market Price at the time of purchase = 857.1428571 Current Yield = Coupon amount/Current Market Price 5% = 60/Current Market Price Current Market Price = 1200 He should pay $857.14 at the time of purchase Worth of Bond today is $1200 If he sold it today then gain will be = 1200-857.14 = 342.8571429 3 Coupon rate = 4% Coupon amount 38.75 Assuming 1000 Face value Current Yield reqd. = 6% 6% = Coupon amount/Current Market Price 6% = 38.75/Current Market Price Current Market Price = 645.8333333 Therefore,vince will pay $645.833. 4 Amount that will be recd. On maturity = 5000 Reqd. return = 6.50% Therefore, Intrinsic Value of the Bond = P.V. of proceed received on maturity = 5000*PVIF(6.5%,13yr) = 2205.08382

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