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1) If bond price is P95,200 against its face value of P100,000, is it worth buying this bond? Assuming that the coupon rate is 4
1) If bond price is P95,200 against its face value of P100,000, is it worth buying this bond? Assuming that the coupon rate is 4.2% and the prevailing interest rate of alternative investment is 4.9% (risk-free rate). The bond is expected to mature one year from now with a default rate of 3%. What is the current yield?
2) Based on question above, what is the yield to maturity? what is the yield to maturity adjusted with default risk?
Expert Solution
1. Current Yield = Coupoun/Market Price * 100
=100000*4.2%/95200 * 100
=4.41%
2. YTM = Coupoun + (Face Value-Market Price)/no. of years whole divided by (Face Value+Market Price)/2 *100
= 4200 + (100000-95200) / 1 whole divided by (100000+95200)/2 *100
= 4200+4800 / 97600 *100
= 9.22%
If default risk then YTM Changes to 12.22% or 6.22% approximately
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