Question

If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a discount below its R1 000 par value.

Answer 1

Coupon payment =0.1 x 1000 = $100

Current yield = 80/bond price = .075

         Therefore, bond price = 10/.095 = $1,066.67

Par value is $1000 by assumption.

Coupon rate = $10/$1000 = .010 = 1.0%

         Current yield = $10/$950 = .0105 = 1.05%