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Alisiya [41]
3 years ago
5

Bond prices and yields Assume that the Financial Management​ Corporation's ​$1 comma 000​-par-value bond has a 7.800 % ​coupon,

matures on May​ 15, 2027, has a current price quote of 106.124 and a yield to maturity​ (YTM) of 6.588 %. Given this​ information, answer the following​ questions: a. What was the dollar price of the​ bond? b. What is the ​bond's current​ yield? c. Is the bond selling at​ par, at a​ discount, or at a​ premium? ​ Why? d. Compare the​ bond's current yield calculated in part b to its YTM and explain why they differ.
Business
1 answer:
Neporo4naja [7]3 years ago
3 0

Answer:

(a) Dollar price of the​ bond = Par value × Current price percentage

                                             = $1,000 × 106.124%

                                             = $1,061.24

(b) Bond's current yield:

Annual interest paid in dollars = Bond par value × Rate of interest

                                                  = $1,000 × 7.8%

                                                  = $78

Current\ yield = \frac{Interest}{Bond\ value}

Current\ yield = \frac{78}{1,061.24}

                              = 0.0734

                              = 7.34%

(c) Issue price of bond is $1,000 and current maturity price is $1,061.24. Thus, bond price is greater than the par value.

(d) Current yield is the return on bond at current price. Yield to maturity is 6.588 % and current yield is 7.34%. Since the current price is more than the par value, therefore, YTM is lower than the current yield.

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