Why lg6 620 yield to maturity the relationship

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Unformatted text preview: and coupon interest rate can be used to predict its pricing level. For each of the bonds listed, state whether the price of the bond will be at a premium to par, at par, or at a discount to par. Bond Coupon interest rate Yield to maturity A 6% B 8 8 C 9 7 D 7 9 E 12 Price 10% 10 LG6 6–21 Yield to maturity The Salem Company bond currently sells for $955, has a 12% coupon interest rate and a $1,000 par value, pays interest annually, and has 15 years to maturity. a. Calculate the yield to maturity (YTM) on this bond. b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond. LG6 6–22 Yield to maturity Each of the bonds shown in the following table pays interest annually. Bond Par value Coupon interest rate A $1,000 B 1,000 12 C 500 12 12 560 D 1,000 15 10 1,120 E 1,000 5 3 900 9% Years to maturity Current value 8 $ 820 16 1,000 CHAPTER 6 Interest Rates and Bond Valuation 303 a. Calculate the yield to maturity (YTM) for each 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. LG2 LG5 LG6 6–23 Bond valuation and yield to maturity Mark Goldsmith’s broker has shown him two bonds. Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 12%. Bond A has a coupon interest rate of 6% paid annually. Bond B has a coupon interest rate of 14% paid annually. a. Calculate the selling price for each of the bonds. b. Mark has $20,000 to invest. Judging on the basis of the price of the bonds, how many of either one could Mark purchase if he were to choose it over the other? (Mark cannot really purchase a fraction of a bond, but for purposes of this question, pretend that he can.) c. Calculate the yearly interest income of each bond on the basis of its coupon rate and the number of bonds that Mark could buy with his $20,000. d. Assume that Mark will reinvest the interest payments as they are paid (at the end of each year) and that his rate of return on th...
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