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3 years ago

A bond investor is analyzing the following annual coupon bonds:

Business

1 answer:

Volgvan3 years ago

7 0

PART (A)

A - TRUE

Explanation:

Johnson Corporation's Coupon rate is 12% and the yield to maturity (YTM) of the bond is 9%. If the Coupon rate is greater than the YTM, the bond is trading at a premium, that is, its current price is greater than its par value.

FV = $1000

N = 10 Years

YTM = 9%

PMT = 12% x $1000 = $120

PV = ??

We calculate the PV (the current price) using a financial calculator

PV = Current Price = $1192.53

Current yield = (Annual Coupon Payment / Current market price) x 100

Current yield = ($120 / $1192.53) x 100 = 10.0626 %

The Current Yield for Johnson's bonds is greater than 9%

B - FALSE

Explanation:

The current yield of Johnson's bonds is 10.06% and therefore does not lie in the range between 0% and 9%

C - TRUE

Explanation:

Johnsons bonds have the highest total return becasue they ahve the highest coupon rate which is greater than the YTM, thei bons trade at a premium.

D - TRUE

Explanation:

When YTM = Coupon rate, the bonds current price is equal to its par value.

PART (B)

If a bond is selling for a price much lower than its par value, it is most likely that the bond is trading for a discount bond.

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