Answered: Bonds of TLM Corporation with a par…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 8MC: Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for...

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Question

Bonds of TLM Corporation with a par value of R1000 sell for R960, mature in five years, and have a 7% annual coupon rate paid semi-annually.

Calculate the current yield and the yield to maturity

What would be the value of the bond described in part b if, just after it had been issued, the expected inflation rate rose by 3 percentage points? Would we now have a discount or a premium bond?

Expert Solution

Step 1 What is Current yield?

Since you have asked multiple questions, we will solve the first question for you. If you want any specific question to be solved then please specify the question number or post only that question.

The current yield is the rate of return a bond generates on its current market value. It is calculated by dividing the annual coupon rate by the market value of the bond.

$C u r r e n t y i e l d = \frac{A n n u a l c o u p o n}{m a r k e t v a l u e} \times 100$

Step 2 Calculating current yield

According to the question we need to calculate the current yield. It will be calculated by the formula above,

Where,

$A n n u a l C o u p o n = R 1000 \times 7 % A n n u a l c o u p o n = R 70 C u r r e n t m a r k e t v a l u e = R 960 P u t t i n g t h e v a l u e s, C u r r e n t y i e l d = \frac{R 70}{R 960} C u r r e n t y i e l d = 7.30 %$

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