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The bond shown in the following table pays interest annually
The bond shown in the following table pays interest annually. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Par value $100 Coupon interest rate 15% Years to maturity 14 Current value $100 a. Calculate the yield to maturity (YTM) for the bond. b. What relationship exists between the coupon interest rate and yield to maturity and the par value and market value of a bond? Explain.
Expert Solution
Answer a.
Par Value = $100
Current Value = $100
Annual Coupon Rate = 15%
Annual Coupon = 15% * $100
Annual Coupon = $15
Time to Maturity = 14 years
Let YTM be i%
$100 = $15 * PVIFA(i%, 14) + $100 * PVIF(i%, 14)
Using financial calculator:
N = 14
PV = -100
PMT = 15
FV = 100
I = 15%
The yield to maturity on this bond is 15.000%
Answer b.
The market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity declines.
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