The Salam Company bond currently sells for $430, 79, has a coupon interest rate

Question

The Salam Company bond currently sells for $430, 79, has a coupon interest rate of 7% and a $1000 per value, pays interest annually, and has 20 years to maturity. Calculate the yield to maturity (YTM) on this bond. Explain the relationship that exists between the coupon interest rate yield to maturity and the par value and market value of a bond. The yield to maturity on this bond is %, (Round to three decimal places.) 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.) The market value of the bond approaches its par values as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity declines. The market value of the bond approaches its par values as the time to maturity increases. The yield to maturity approaches the coupon interest rate as the time to maturity declines. The market value of the bond approaches its par values as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity increases. The market value of the bond approaches its par values as the time to maturity increases. The yield to maturity approaches the coupon interest rate as the time to maturity increases.

Explanation / Answer

Answer 1.

Let YTM be r%.

Annual Coupon = $70

Maturity Value = $1,000

Time = 20 years

Bond Value = $430.79

Therefore, 430.79 = 70*(1-(1/(1+r))^20) / r + 1,000/(1+r)^20

Therefore, r = 17.24%

Answer 2.

The market value of the bond approaches its par value as the time maturity decline. The yield to maturity approaches the coupon interest rate as the time to maturity declines.

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