Yield to maturity The bond shown in the following table pays interest annually a
ID: 2766485 • Letter: Y
Question
Yield to maturity The bond shown in the following table pays interest annually
a)Calculate the yield maturity (YTM) for the bond
b)What relationship exists between the coupon interest rate and yield to maturity and the par value and market value of a bond? (choose one from 1-4)
1. The market value of the bond approaches its par value as the time to maturity increases. The yield to maturity approaches the coupon interest rate as the time to maturity increases.
2. The market value of the bond approaches its par value as the time to maturity increases. The yield to maturity approaches the coupon interest rate as the time to maturity declines.
3.The market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity increases.
4.The market value of the bond approaches its par value as the time to maturity declines.The yield to maturity approaches the coupon interest rate as the time to maturity declines.
Par value Coupon interest rate Years to maturity Current value $500 11% 18 $430Explanation / Answer
Answer
annual interest +(per value –market price / no of years of maturity )
(per value + market price / 2)
= 13.05%
(B) 4.The market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity declines.
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