Final answer:
The Financial Management Corporation's bond is selling for $1,119.18, has a current yield of 6.34%, and is trading at a premium due to its higher coupon rate compared to the current YTM. The current yield only accounts for the income received from interest payments, while YTM includes both the income and any capital gains or losses.
Step-by-step explanation:
Understanding Bond Prices and Yields
The Financial Management Corporation's bond with a $1,000 par value and a 7.100% coupon rate is currently being sold at a price quote of 111.918. This percentage of the par value indicates that the bond is selling for $1,119.18 (111.918% of $1,000), which is the dollar price of the bond.
The bond's current yield is calculated by taking the annual coupon payment and dividing it by the current bond price. Therefore, the current yield is ($71.00 / $1,119.18) = 6.34%.
This bond is selling at a premium because its current price ($1,119.18) is higher than its par value ($1,000). The bond is trading at a premium because its coupon rate is higher than the current market yield to maturity (YTM) of 6.724%.
The current yield and the YTM of a bond can differ because the current yield does not take into account any capital gains or losses that an investor will realize if the bond is held to maturity; it solely reflects the income component (interest payments) relative to the current price. In contrast, the YTM reflects the total rate of return, including both the income generated and any capital gains or losses that will occur if the bond is held until it matures.