Question

Bond P is a premium bond with a coupon rate of 9.7 percent. Bond D is a discount bond with a coupon rate of 5.7 percent. Both bonds make annual payments, have a YTM of 7.7 percent, have a par value of $1,000, and have twelve years to maturity.

a) What is the current yield for Bond P?

b) What is the current yield for Bond D?

c) What is the market price of Bond P?

d) What is the market price of Bond D?

Answer 1

The current yield for Bond P is calculated by dividing the annual coupon payment by the market price of the bond. The market price of Bond P can be calculated by using the present value formula. Similarly, the current yield for Bond D is calculated by dividing the annual coupon payment by the market price of the bond. The market price of Bond D can be calculated by using the present value formula.

Step-by-step explanation:

a) Current yield for Bond P:

The current yield is calculated by dividing the annual coupon payment by the market price of the bond. For Bond P, the annual coupon payment is 9.7% of the par value, which is $97. So the current yield is $97 divided by the market price of Bond P.

b) Current yield for Bond D:

Similarly, for Bond D, the annual coupon payment is 5.7% of the par value, which is $57. So the current yield is $57 divided by the market price of Bond D.

c) Market price of Bond P:

To calculate the market price of Bond P, we need to use the present value formula. The present value of the coupon payments can be calculated by discounting each payment by the yield to maturity. The present value of the par value can be calculated by discounting it by the yield to maturity.

d) Market price of Bond D:

Similarly, to calculate the market price of Bond D, we use the present value formula. The present value of the coupon payments and the par value are calculated by discounting them by the yield to maturity.