7.6)A bond has a $1,000 par value, 8 years to maturity, and a 7% annual coupon and sells for $980.
%
$
The Approximate Yield to Maturity Formula =[Coupon + ( Face Value - Market Price) / Number of years to maturity] / [( Face Value + Market Price)/2 ] *100
= [$ 70+ ( $ 1,000- $ 980) /8] /[( $ 1,000+ $ 980)/2] *100
=72.5/990*100
= 7.32%%
Note : Coupon = Rate * Face Value
= 7% * $ 1,000
= $ 70
Since this formula gives an approximate value, the financial calculators can be used alternatively.
where,
Par Value = $ 1,000
Market Price = $ 980
Annual rate = 7% and
Maturity in Years = 8Years
Hence the yield to maturity = 7.34%
Answer = 7.34%
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b. Current Price = $ 980
Price 5 years from today:
Price of bond = Coupon * PVIFA (n,i)+ face value * PVIF (n,i)
Price of bond= 70* PVIFA (3 , 7.34%) + 1000 * PVIF ( 3 ,7.34%)
Price of bond = 70* 2.6080989401498+ 1000*0.8085655377930
= 991.13
Hence the correct answer is $ 991.13
7.6)A bond has a $1,000 par value, 8 years to maturity, and a 7% annual coupon...
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