Determine the current market prices of the following $1,000 bonds if the compara
ID: 2717982 • Letter: D
Question
Determine the current market prices of the following $1,000 bonds if the comparable rate
is 10% and answer the following questions.
Be sure you show your work here for the price and current yield and then answer
the questions below.
XY 5.25% (interest paid annually) for 20 years
AB 14% (interest paid annually) for 20 years
A. Which bond has a current yield that exceeds the yield to maturity?
B. Which bond may you expect to be called? Why?
C. If CD, Inc., has a bond with a 5.25% coupon and a maturity of 20 years but which was
lower rated, what would be its price relative to the XY, Inc., bond? Explain
Explanation / Answer
Computation of market price of bonds
XY = $52.50*8.5136 + $1000*0.1486 = $595.56
AB = $140*8.5136 + $1000*0.1486 = $1340.504
(A) Bond XY
Current yeild = ($52.50/$595.56)*100 = 8.82%
YTM = {$52.50 + ($1000 - $595.56)/20}/[($1000+595.56)/2] = 9.12%
Bond AB
Current yeild = ($140/1340.504)*100 = 10.44%
YTM = {$140 + ($1000-$1340.504)/20}/[(1000+1340.504)/2] = 10.51%
None of the bonds have Current yeild that exceeds YTM
(B) Bond AB is expected to be called since its market price is lower than its face value.