Question

5.   Assume that the Financial Management Corporation’s $1,000-par-value bond had a 5.700% coupon, matured on May 15, 2020, had a current price quote of 96.708, and had a yield to maturity (YTM) of 8.034%. Given this information, answer the following questions:

1. What was the dollar price of the bond?
2. What is the bond’s current yield?
3. Is the bond selling at par, at a discount, or at a premium? Why?
4. Compare the bond’s current yield calculated in part b to its YTM and explain why they differ.

Answer 1

a) The dollar price of the bond = Par value of bond * current price
Par value of bond= $1,000
Current price = 96.708 percent
The dollar price of the bond = $1,000 * 96.708%
= $967.08.
Dollar price of bond is $967.08

b) Bond's current yield = (Par value of bond * Coupon rate)/Current price
= ($1,000 * 5.7%)/ $967.08
= $57/$967.08
= 5.894%

c) The bond is selling at a discount. Because the yield to maturity is greater than the current yield and the coupon rate.

d) Current yield of bond is 5.894% and Yield to maturity is 8.034%. The difference between current yield and yield to maturity is because currently bond is trading at discount. Current yield is the yield on a current coupon payments and YTM is the yield that you are making if you would merely hold the bond without receiving coupon payments.