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Please explain how this answer was determined using formulas or a financial calculator if applicable. Especially part A. Thanks! 8. Croft Inc, bonds have a
Please explain how this answer was determined using formulas or a financial calculator if applicable. Especially part A. Thanks!
8. Croft Inc, bonds have a par value of $1,000. The bonds have a 4% coupon rate and will mature in 10 years. Assume the bond is semi-annual a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively. b. Explain the impact on price if the required rate of return decreases. c. How does the relationship between the coupon rate and the yield to maturity determine how a bond's price will compare to it par value? Answer: a. 7% YTM price = $1,071.06 8% YTM price = $1,000.00 9% YTM price = $934.96 b. The price of the bond will increase. c. Coupon rate = 8% 1) A bond with a YTM above the coupon rate will sell at a discount (below par value). The investor will pay less than the par value for the bond, but will receive its par value at maturity. This built-in gain drives the investor's return up above the coupon rate. If the coupon rate equals the YTM, the bond will sell for its par value. If the YTM is below the coupon rate, the coupons are attractive thus an investor will pay more than the par value for the bondStep by Step Solution
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