Question

Bond prices and yields Assume that the Financial Management​ Corporation's ​$1 comma 000​-par-value bond has a 7.800 % ​coupon, matures on May​ 15, 2027, has a current price quote of 106.124 and a yield to maturity​ (YTM) of 6.588 %. Given this​ information, answer the following​ questions: a. What was the dollar price of the​ bond? b. What is the ​bond's current​ yield? c. Is the bond selling at​ par, at a​ discount, or at a​ premium? ​ Why? d. Compare the​ bond's current yield calculated in part b to its YTM and explain why they differ.

Answer 1

(a) Dollar price of the​ bond = Par value × Current price percentage

= $1,000 × 106.124%

= $1,061.24

(b) Bond's current yield:

Annual interest paid in dollars = Bond par value × Rate of interest

= $1,000 × 7.8%

= $78

`Current\ yield = (Interest)/(Bond\ value)`

`Current\ yield = (78)/(1,061.24)`

= 0.0734

= 7.34%

(c) Issue price of bond is $1,000 and current maturity price is $1,061.24. Thus, bond price is greater than the par value.

(d) Current yield is the return on bond at current price. Yield to maturity is 6.588 % and current yield is 7.34%. Since the current price is more than the par value, therefore, YTM is lower than the current yield.