Question

Charlotte's Clothing issued a 5 percent bond with a maturity date of 15 years. Five years have passed and the bond is selling for $690. Assume that the bond pays interest annually.

1. What is the current yield? Round your answer to two decimal places.

     %

2. What is the yield to maturity? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest whole number.

     %

3. If three years later the yield to maturity is 10 percent, what will be the price of the bond? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. $

Appendix B

$Appendix_B.jpg$

Appendix D

$Appendix_D.jpg$

Answer 1

a

current yield = coupon rate*par value/current price

Current yield%=(5/100)*1000/690

Current yield% = 7.25

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =10

690 =∑ [(5*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^10

k=1

YTM% = 10

c

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =7

Bond Price =∑ [(5*1000/100)/(1 + 10/100)^k]     +   1000/(1 + 10/100)^7

k=1

Bond Price = 757