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Calculating the Valuation of Bonds

A bond has a $1,000 par value, 10 years to maturity, a 7 percent annual coupon, and sells for $985.

a. What is its current yield?
b. What is its yield to maturity (YTM)?
c. Assume that the yield to maturity remains constant for the next 3 years. What will the price be 3 years from today?

Solution Preview

Current yield and yield to maturity:
A bond has a $1,000 par value, 10 years to maturity,
a 7 percent annual coupon, and sells for $985.

a. What is its current yield?
b. What is its yield to maturity (YTM)?
c. Assume that the yield to maturity remains constant for the next 3 years. What will the price be 3 years from today?

Please view the attached file for proper formatting.

a. What is its current yield?

Annual interest = 7% annual coupon x $1000 Face value = $70
Price = $985
Current yield= Annual interest / Price = 7.11% = 70/985

b. What is its yield to maturity (YTM)?

YTM can be found by trial and error
We will find the discount rate that makes the discounted cash flows equal to the price of the ...

Solution Summary

This solution illustrates the calculations required to derive the current yield, yield to maturity and future price of a bond. An Excel document accompanies the solution and provides the response in proper formatting.

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