A bond has $1,000 face value, coupon rate of 5.6%, and yield to maturity (YTM) of 5.8%. It will mature in 15 years and the inter
1 answer:
Answer:
Current Yield of the bond = 0.057134 or 5.7134% rounded off to 5.71%
Explanation:
A current yield refers to the annual return that a security provides based on the interest or dividend payments it makes expressed as a percentage of it current price. Thus, the current yield on bond can be calculated as follow,
Current Yield - bond = Interest payment per year / Current price
To calculate the current yield, we need the present value or current price of the bond.
To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,
Coupon Payment (C) = 1000 * 0.056 * 6/12 = $28
Total periods (n) = 15 * 2 = 30
r or YTM = 0.058 * 6/12 = 0.029 or 2.9%
The formula to calculate the price of the bonds today is attached.
Bond Price = 28 * [( 1 - (1+0.029)^-30) / 0.029] + 1000 / (1+0.029)^30
Bond Price = $980.143753 rounded off to $980.14
Current Yield of the bond = (28 * 2) / 980.14
Current Yield of the bond = 0.057134 or 5.7134% rounded off to 5.71%
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Answer:
Put options give the holder the right to sell the underlying stock to the seller of the put option.
Put options are advantageous when the price in the market falls below the strike price of the option because the buyer will be able to sell at above market value and make a profit.
The asking price for a strike price of $9.00 is listed to be $0.33 and this is the premium paid by the buyer of the Put Option.
<h2>1. Return if stock sells for $8.00</h2>
= Amount received/ Amount spent
= (No. of shares * ((Strike price - Market price) - Premium paid) ) / (No. of share * premium)
= (2,300 shares * (($9.00 - 8.00) - 0.33))/ ( 2,300 * 0.33)
= 2.03
= 203 %
<h2>2. Return if stock sells for $10.00. </h2>As this is an option, the investor can decide not to sell to the seller. The market price is higher than the strike price so they will not sell to the seller of the option and the return will be;
= (No. of shares * - Premium paid) ) / (No. of share * premium)
= (2,300 shares * - 0.33)/ ( 2,300 * 0.33)
= -1
= -100 %
