A bond with face value 1000 has a current yield of 66 and a

A bond with face value $1,000 has a current yield of 66% and a coupon rate of 8 8.6%. ate calculations. Round your answer to 2 decimal a. If interest is paid annually, what is the bond\'s price? (Do not round i places.) b. Is the bond\'s yield to maturity more or less than 86%? O More Less

Solution

a. Bond Price $ 1,303.03 b. Less Working: Price of bond is the present value of cash flow from bond and cash flow from bond is discounted at rate of yield to maturity. Present value of cash flows and discount rate has adverse relation.It means if discount rate increases, present value of cash fllow decreases and vice versa.So, as price of bond is more than its face value.It means yield to maturity is less than its coupon rate. Step-1:Calculation of Annual coupon amount Annual coupon amount = Face Value x Annual coupon rate = $       1,000 x 8.60% = $ 86 Step-2:Calculation of Current Price Current Yield = Annual coupon /Current Price or,         0.066 = $ 86 / Current Price or, Current Price = $ 86 /         0.066 or, Current Price = $ 1,303.03