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A General Power bond carries a coupon rate of 8
A General Power bond carries a coupon rate of 8.6%, has 9 years until maturity, and sells at a yield to maturity of 7.6%. (Assume annual interest payments.) a. What interest payments do bondholders receive each year? b. At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What will happen to the bond price if the yield to maturity falls to 6.6%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. If the yield to maturity falls to 6.6%, will the current yield be less, or more, than the yield to maturity? a. $ 86 Interest payments Price b. C. Price will by than yield to maturity. d. Current yield is
Expert Solution
a. interest payments = 8.6% of 1000 = 86
b. FV = 1000, N = 9, rate = 7.6%, PMT = 86
use PV function in Excel
price = 1063.52
c.
FV = 1000, N = 9, rate = 6.6%, PMT = 86
use PV function in Excel
price = 1132.55
price will increase by 69.03
d. current yield = 86/1132.55 = 7.59%
current yield is therefore more
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