14-6BondYield, Price, & YTM.A corporate bond maturing in 15 years with a coupon rate of 9.9% was purchased for $980 and it now selling for $1,010.

a. What is its current yield using?

b. What will be its selling price in 2 years if comparable market interest rates drop 1.9 % points?

c. Calculate the bond's YTM using

*A 15 year bond has 30 semi-annual interest payments. After 2 years, there are 13 years to maturity, 26 interest payments left.

14-6a. Current yield= current annual interest income $99 / current market price $1010 = 9.8%

b. Selling price, in 2 years=(Annual interest payment / 2x PVIFAi,n)+(Lump sum X PVIFi,n)

= ($99/2 x PVIFA4%,26) + ($1,000 x PVIF4%,26)

= ($49.50 x 15.9828) + $1,000 x 0.3607)

= $791.15 + $360.70 = $1151.85

c.YTM = {$99 + [( $1,000 - $980) / 15 years] } /[ ($1,000 + $980) / 2 ] = 10.13%

***A bond issue is normally divided into individual bonds with a face value of $1,000 or a multiple of $1,000. The face value is called the principal; this is the amount that must be repaid at maturity. The contract between the company issuing the bonds and the bond purchasers is called a bond indenture. The price the company receives for a $1,000 face value bond may not be $1,000. The price received depends upon the face value, the interest rate of the bonds, and the market rate of similar investments. By comparing the market interest rates, it can be determined whether the bonds will sell for face value, a premium (>$1,000), or a discount (<$1,000).

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