A General Power bond carries a coupon rate of 9.2%, has 9 years until maturity, and...

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Finance

A General Power bond carries a coupon rate of 9.2%, has 9 yearsuntil maturity, and sells at a yield to maturity of 8.2%. (Assumeannual interest payments.)
a. What interest payments do bondholdersreceive each year?
b. At what price does the bond sell?(Do not round intermediate calculations. Round your answerto 2 decimal places.)
c. What will happen to the bond price if theyield to maturity falls to 7.2%? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)
d. If the yield to maturity falls to 7.2%, willthe current yield be less, or more, than the yield to maturity?
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Answer & Explanation Solved by verified expert

4.2 Ratings (838 Votes)

interest payment = coupon rate *par value = 0.092*1000 = 92

K = N

Bond Price =? [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N

k=1

K =9

Bond Price =? [(9.2*1000/100)/(1 + 8.2/100)^k] + 1000/(1 + 8.2/100)^9

k=1

Bond Price = 1061.95

K = N

Bond Price =? [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N

k=1

K =9

Bond Price =? [(9.2*1000/100)/(1 + 7.2/100)^k] + 1000/(1 + 7.2/100)^9

k=1

Bond Price = 1129.2

Change in price = 1129.2-1061.95=67.25, "Rise by 67.25"

current yield = coupon rate*par value/current price

Current yield%=(9.2/100)*1000/1129.2

Current yield% = 8.15

Current yield is more than YTM

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Transcribed Image Text

A General Power bond carries a coupon rate of 9.2%, has 9 yearsuntil maturity, and sells at a yield to maturity of 8.2%. (Assumeannual interest payments.)a. What interest payments do bondholdersreceive each year?b. At what price does the bond sell?(Do not round intermediate calculations. Round your answerto 2 decimal places.)c. What will happen to the bond price if theyield to maturity falls to 7.2%? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)d. If the yield to maturity falls to 7.2%, willthe current yield be less, or more, than the yield to maturity?MoreLess