Finance: Coupon Rates
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I need help with the following:
1. Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10% coupon bond sells at par? Two years from now the required return on the same bond is 8%. What is the coupon rate on the bond now? The YTM?
2. Suppose you buy a 7% coupon, 20 year bond today when it's first issued. If interest rates suddenly rise to 15%, what happens to the value of your bond? Why?
3. IRT Company has 7% coupon bonds on the market that have 8 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 9%, what is the current bond price?
4. The Timber Co. has 10% coupon bonds on the market with 9 years left to maturity. The bonds make annual payments. If the bond currently sells for $1,145.70, what is the YTM?
5. MAX Enterprises has bonds on the market making annual payments, with 16 years to maturity and selling for $963. At this price, the bonds yield 7.5 percent. What must the coupon rate be on Merton's bonds?
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Solution Summary
The coupon rates on a bond is given. The yield to maturity after years are given.
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1. The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate. For non-callable bonds, the yield to maturity and required rate of return are interchangeable terms.
Unlike YTM and required return, the coupon rate is not a return used as the interest rate in bond cash flow valuation, but is a fixed percentage of par over the life of the bond used to set the coupon ...
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