Determine the current market prices of the following $1,000.00 bonds if the comp
ID: 2731236 • Letter: D
Question
Determine the current market prices of the following $1,000.00 bonds if the comparable rate is 10% and answer the following questions.
BE SURE TO SHOW YOUR WORK HERE FOR THEPRICE AND CURRENT YIELD AND THEN ANSWER THE QUESTIONS BELOW.
XY 5.25% (Interest paid annually) for 20 years
AB 14% (interest paid annually) for 20 years
A. Which bond has a current yield that exceeds the yield to maturity?
B. Which bond may you expect to be called? Why?
C. If CD, INC., has a bond with a 5.25% coupon and a maturity of 20 years but which was lower rates, what would be its price relative to the XY, INC., bond? Explain,
Explanation / Answer
Current price of XY = C * PVIFA(dr , n) + F * PVIF (dr, n)
= 52.50 * PVIFA(10%, 20) + 1000 * PVIF(10%, 20) = 52.50 * 8.514 + 1000 * 0.149 = $596
Current Yield of XY = C / current price = 52.50 / 596 = 0.088
YTM of XY =[ C + ( FV - CV) / n ] / ( FV + CV) / 2 = [52.50 + 1000-596/20] / (1000+596)/2 = 0.091
Current price of AB = C * PVIFA(dr , n) + F * PVIF (dr, n)
= 140 * PVIFA(10%, 20) + 1000 * PVIF(10%, 20) = 140 * 8.514 + 1000 * 0.149 = $1341
Current Yield of AB = C / current price = 140 / 1341 = 0.104
YTM of AB =[ C + ( FV - CV) / n ] / ( FV + CV) / 2 = [140 + 1000-1341] / (1000+1341)/2 = 0.105
Answer A) No, neither bonds has a current yield that exceeds the Yield to Maturity.
Answer B) We expect to be called Bond AB for being higher interest, current price, current yield and YTM.
Answer C) The current price of both bonds CD and XY be the same ie. $596 as both bonds coupon (ie. interest paid annually) are the same 5.25% for 20 years.
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