Question

A bond with face value $1,000 has a current yield of 6% and a coupon rate of 8%. a. If interest is paid annually, what is the bond’s price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Is the bond’s yield to maturity more or less than 8%? More Less

Answer 1

Answer:

a. Price of Bond is $1,333.33

b. Less

Explanation:

a.

Current yield is the ratio of coupon payment to the market value of the bond. It is the rate of income received from bond at current market rate.

As given

Coupon Payment = $1,000 x 8% = $80

Current Yield formula is as follow

Current Yield = Coupon Payment / Market Value

6% = $80 / Market Value

Market Value = $80 / 6%

Market Value = $1,333.33

b.

As we know that

if Price > Face value then YTM < Coupon rate

if Price < Face value then YTM > Coupon rate

if Price = Face value then YTM = Coupon rate

According to given condition

$1,333.33 > $1,000 then YTM < 8%

The bond’s yield to maturity is less than 8%.