Footsteps Co. has a bond outstanding with a coupon rate of 5.2 percent and annual payments. The bond currently sells for $1,012.50, matures in 16 years, and has a par value of $1,000. What is the YTM of the bond?
Footsteps Co. has a bond outstanding with a coupon rate of 5.2 percent and annual payments. The bond currently sells for $1,012.50, matures in 16 years, and has a par value of $1,000. What is the YTM of the bond?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![### Understanding Yield to Maturity (YTM) Calculation
**Problem Statement:**
*Footsteps Co. has a bond outstanding with a coupon rate of 5.2 percent and annual payments. The bond currently sells for $1,012.50, matures in 16 years, and has a par value of $1,000. What is the YTM of the bond?*
**Explanation:**
To determine the Yield to Maturity (YTM) of a bond, we need to find the interest rate that equates the present value of the bond’s future cash flows to its current price. The formula for YTM involves iterative computation and can be expressed as follows:
\[ \text{Bond Price} = \sum \frac{\text{Coupon Payment}}{(1+YTM)^t} + \frac{\text{Face Value}}{(1+YTM)^n} \]
Where:
- Coupon Payment = \( 0.052 \times 1000 = \) $52 (annual coupon payment)
- Face Value = $1,000
- Current Price = $1,012.50
- n = Number of years to maturity = 16
**Multiple Choice Options:**
To find the YTM, consider the following choices and check which aligns with the calculated or estimated YTM value.
- [ ] 4.24%
- [ ] 5.20%
- [ ] 5.14%
Typically, a financial calculator or a software program is used for precision, but we can also approximate through trial and error.
---
### Multiple Choice
1. **4.24%**
2. **5.20%**
3. **5.14%**
### Key Points:
- **Coupon Rate**: The annual coupon payment expressed as a percentage of the face value.
- **Current Price**: The price at which the bond is currently selling in the market.
- **Face Value**: The bond's nominal value to be repaid at maturity.
- **Years to Maturity**: The remaining time until the bond matures and the face value is repaid.
Understanding these aspects and applying them to the appropriate financial formulas is crucial for accurate financial analysis and decision-making.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F249e3087-ac84-499e-a043-461bff034fe9%2Fa0c34323-c2a2-433a-b8bb-7b5e43c1126d%2F8wk9nfl.png&w=3840&q=75)
Transcribed Image Text:### Understanding Yield to Maturity (YTM) Calculation
**Problem Statement:**
*Footsteps Co. has a bond outstanding with a coupon rate of 5.2 percent and annual payments. The bond currently sells for $1,012.50, matures in 16 years, and has a par value of $1,000. What is the YTM of the bond?*
**Explanation:**
To determine the Yield to Maturity (YTM) of a bond, we need to find the interest rate that equates the present value of the bond’s future cash flows to its current price. The formula for YTM involves iterative computation and can be expressed as follows:
\[ \text{Bond Price} = \sum \frac{\text{Coupon Payment}}{(1+YTM)^t} + \frac{\text{Face Value}}{(1+YTM)^n} \]
Where:
- Coupon Payment = \( 0.052 \times 1000 = \) $52 (annual coupon payment)
- Face Value = $1,000
- Current Price = $1,012.50
- n = Number of years to maturity = 16
**Multiple Choice Options:**
To find the YTM, consider the following choices and check which aligns with the calculated or estimated YTM value.
- [ ] 4.24%
- [ ] 5.20%
- [ ] 5.14%
Typically, a financial calculator or a software program is used for precision, but we can also approximate through trial and error.
---
### Multiple Choice
1. **4.24%**
2. **5.20%**
3. **5.14%**
### Key Points:
- **Coupon Rate**: The annual coupon payment expressed as a percentage of the face value.
- **Current Price**: The price at which the bond is currently selling in the market.
- **Face Value**: The bond's nominal value to be repaid at maturity.
- **Years to Maturity**: The remaining time until the bond matures and the face value is repaid.
Understanding these aspects and applying them to the appropriate financial formulas is crucial for accurate financial analysis and decision-making.
Transcribed Image Text:The image displays a section of a user interface for an online poll or survey. There are two selectable options:
1. The first option is represented by an unselected circular radio button, with a label that states "4.58%."
2. The second option is represented by a selected circular radio button with a blue fill, and a corresponding label stating "5.08%."
It appears that the user has selected the second option, as indicated by the blue fill in the radio button.
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