1. (a) ABC Co. has 10% coupon bonds (par = $1,000) making annual payments with a

Question

1. (a) ABC Co. has 10% coupon bonds (par = $1,000) making annual payments with a (YTM) of 8.5%. The current yield on these bonds is 9.01%. How many years do these bonds have left until they mature?

(b) A corporate bond has the coupon rate of 8% and the yield to maturity (YTM) of 9%. What can you infer about the current yield of this Bond? Specifically, is it below 8%, between 8% and 9%, or above 9%? Please explain your reasoning verbally (i.e., do not compute the current yield of a hypothetical bond with 8% coupon rate and 9% YTM).

(show financial calculator functions used, i, n, pv, fv, pmt, ect...)

Explanation / Answer

a.

Current yield = Annual coupon/Bond price

Bond price = 0.1*1000/0.0901 = $1109.88

Input the following values in the financial calculator.

I/Y = 8.5%

PMT = 0.1*1000 = 100

PV = 1109.88

FV = 1000

CPT -> N = 11.95 years

b.

Current yield = Annual coupon/Bond price

For a bond with coupon rate less than YTM, bond price will be less than the par value.

So current yield will be between greater than coupon rate and less than YTM.

So, current yield is between 8% and 9%.

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