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A General Power bond carries a coupon rate of 9.2%, has 9 years until maturity, and...

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Finance

A General Power bond carries a coupon rate of 9.2%, has 9 yearsuntil maturity, and sells at a yield to maturity of 8.2%. (Assumeannual interest payments.)

a. What interest payments do bondholdersreceive each year?

b. At what price does the bond sell?(Do not round intermediate calculations. Round your answerto 2 decimal places.)

c. What will happen to the bond price if theyield to maturity falls to 7.2%? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)

d. If the yield to maturity falls to 7.2%, willthe current yield be less, or more, than the yield to maturity?

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Answer & Explanation Solved by verified expert
4.2 Ratings (838 Votes)

a

interest payment = coupon rate *par value = 0.092*1000 = 92

b

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =9
Bond Price =? [(9.2*1000/100)/(1 + 8.2/100)^k]     +   1000/(1 + 8.2/100)^9
                   k=1
Bond Price = 1061.95

c

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =9
Bond Price =? [(9.2*1000/100)/(1 + 7.2/100)^k]     +   1000/(1 + 7.2/100)^9
                   k=1
Bond Price = 1129.2

Change in price = 1129.2-1061.95=67.25, "Rise by 67.25"

d

current yield = coupon rate*par value/current price
Current yield%=(9.2/100)*1000/1129.2
Current yield% = 8.15

Current yield is more than YTM
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Transcribed Image Text

A General Power bond carries a coupon rate of 9.2%, has 9 yearsuntil maturity, and sells at a yield to maturity of 8.2%. (Assumeannual interest payments.)a. What interest payments do bondholdersreceive each year?b. At what price does the bond sell?(Do not round intermediate calculations. Round your answerto 2 decimal places.)c. What will happen to the bond price if theyield to maturity falls to 7.2%? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)d. If the yield to maturity falls to 7.2%, willthe current yield be less, or more, than the yield to maturity?MoreLess

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