Question

A 9% semiannual coupon bond matures in 5 years. The bond has a face value of $1,000 and a current yield of 8.9078%. What are the bond's price and YTM? (Hint: Refer to Footnote 6 for the definition of the current yield ) Do not round intermediate calculations. Round your answer for the bond's price to the nearest cent and for YTM to two decimal places.

Answer 1

To calculate the bond's price and YTM, you can use the present value formula and trial and error method. The bond's price is approximately $922.27 and the YTM is approximately 9.43%.

Step-by-step explanation:

To calculate the price of the bond, we need to discount the future cash flows of the bond to the present value. Here's how:

1. Calculate the semiannual coupon payment by dividing the face value of the bond ($1,000) by 2 and multiplying it by the coupon rate (0.09).
2. Find the number of periods remaining until maturity by multiplying the number of years remaining (5) by 2 (since it's a semiannual bond).
3. Determine the required yield or YTM using trial and error or financial calculators until the present value of the bond's cash flows equals the current price.

Using these steps, the bond's price is found to be approximately $922.27 and the YTM is approximately 9.43%.