- A bond’s coupon is the dollar value of the periodic interest payment promised to bondholders; this equals the coupon rate times the face value of the bond. For example, since the bond issuer promises to pay an annual coupon rate of 11% to bond holders and the face value of the bond is K100, the bond holders are being promised a coupon payment of (0.11)(K100) = K11 per year.
While the yield rate of the bond will be obtained as,
Current yield=Market PriceAnnual interest paid⋅100%Current yield=77.350.11⋅100⋅100%=14.22%
2. The present value of the investment
PV=PMT⋅[i1−(1+i)−n]⟹ PV=11⋅[0.111−(1+0.11)−5]=11⋅[0.111−0.5935]=11⋅[0.110.4065]=11⋅3.6955=40.6505
3. The yield to maturity of the bond
YTM=2FV+PVc+tFV−PV Where C-Coupon Payment
FV-Face Value
PV-Present Value
t- time for security to mature
YTM=2100−40.650511+5100−40.6505=70.325311+10.8699=0.31098 Since the present value of the investment is a positive, then i could advise the client to invest K50,000.
Comments
Leave a comment