Answer to Question #176397 in Management for Eric

Question

Rrosilk Corporation issued a 10-year, non-callable, 7% semiannual coupon bond at the price of $1,020 two years ago. Today, the market interest rate on the bond is 6%.

 a. Please compare the yield to maturity of the bond with its coupon rate when the bond was issued without any calculation and explain the reason. (4 marks) 

b. What was the yield to maturity when the bond was issued? (5 marks) 

c. What is the current price of the bond? (5 marks) 

Answer 1

A. Yield to maturity is the worth of the coupon articulated as a fraction of the bond's value. The return rate is the profit over a precise holding time, which considers the coupon rate and the price change. A bond's coupon rate is equal to its yield to maturity if its acquisition value is equivalent to its par value. The par value of a bond is the specified price of the bond at the time of issuance, as defined by the supplying organization.

The depositor expects the credit spread on the country's sovereign to pad in the future. The yield pads off clean interest and credit constituents, a solidity in the state's credit spread will reduce the bond's market essential profit. Investors stand to benefit on a mark to commercial bases on the bond it grasps if that occurs.

B. PMT=coupon=7%*1020=7140

I=rate=7%

FV=1020

n=20

PV---> calculate – 1.17

C. 1020*1.17

=$1,193.40