a)
To determine: The relationship that exists between the yield to maturity and the
Introduction:
A bond refers to the debt securities issued by the governments or corporations for raising capital. The borrower does not return the face value until maturity. However, the investor receives the coupons every year until the date of maturity.
If the bond sells at a steep discount during the issue and does not make any coupon payments during its life, then the bond is a zero coupon bond.
Yields refer to the
Bond price refers to the price at which the bond the investors buy and sell in the market. It is the sum of present value of the lump sum amount received at the end of the maturity and the coupon payments.
b)
To determine: The reason why bonds sell at a premium or discount and the relationship between the yield to maturity and the coupon rate of premium, discount, and par bonds.
Introduction:
A bond refers to the debt securities issued by the governments or corporations for raising capital. The borrower does not return the face value until maturity. However, the investor receives the coupons every year until the date of maturity.
If the bond sells at a steep discount during the issue and does not make any coupon payments during its life, then the bond is a zero coupon bond.
Yields refer to the return on the investment made by an investor. A bond yield refers to the return earned by the investor on the bond if he or she holds the bond until the bond matures.
c)
To determine: The relationship between the yield to maturity and the current yield of par, discount, and premium bonds.
Introduction:
The current yield of the bond is the annual coupon of the bond divided by the price of the bond.
Want to see the full answer?
Check out a sample textbook solutionChapter 6 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- How do you calculate the price of bonds if you know their par value, contract rate, and market rate?arrow_forwardDescribe in detail the key features of a bond (face value, maturity, coupon rate, coupon, yield to maturity, current yield). What are the cash flows associated with a bond? What is a discount bond? Premium bond? Par bond? How does the price of a bond vary in relationship to market rates?arrow_forwardHow do you calculate the current value (price) of a bond? Explain through the formula and its description in your own words. How is the bond price affected by the change in interest rates and why?arrow_forward
- 1. What is the relationship between interest rate level and bond price? Why must this relationship be true? How has the current rate environment impacted the prices of bonds?arrow_forwardWhat is the link between the price of a bond and the rate of interest? Describe the origins of this connection in your own words. How can we utilize this connection to calculate the bond's value?arrow_forwardWhat is the relationship between bond prices and interest rates? Describe how this link came to be developed in detail. How can we utilize this connection to determine the value of a bond?arrow_forward
- True or False? Macaulay duration of measure of the curvature in the relationship between bond prices and bond yields.arrow_forwardIf you know the par value of bonds, the contract rate, and the market rate, how do you compute the bonds’ price?arrow_forwardWhat is the difference between the coupon rate and the current market interestrate of a bond?arrow_forward
- 2. How does a bond issuer decide on the appropriate coupon rates to set on its bonds? Explain the difference between the coupon rate and the required return?arrow_forwardWhat is the relationship between bond price and interest rate? Describe in fully how this relationship was made. What approach may we use to calculate the bond's value based on the relationship?arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
- Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning