Question

Assume that an investor is looking at two bonds: Bond A is a 15-year, 10.5% (semiannual pay) bond that is priced to yield 11%. Bond B is a 15-year, 9.5% (annual pay) bond that is priced to yield 8.5%. Both bonds carry 7-year call deferments and call prices (in 7 years) of $1,060. a. Which bond has the higher current yield? b. Which bond has the higher YTM? c. Which bond has the higher YTC? a. The current yield of Bond A is %. (Round to two decimal places.)

Answer 1

The Price of the Bond-A

· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 10.50% x ½]	PMT	52.50
Market Interest Rate or Yield to maturity on the Bond [11.00% x ½]	1/Y	5.50
Maturity Period/Time to Maturity [15 Years x 2]	N	30
Bond Price/Current Market Price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $963.67.

Current Yield of the Bond-A

Current Yield of the Bond = [Annual Coupon Amount / Bond Price] x 100

= [($1,000 x 10.50%) / $963.67] x 100

= [$105 / $963.67] x 100

= 10.90%

“Hence, the Current Yield of the Bond-A will be 10.90%”