A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price. In simple terms, it is the average rate of return a holder can expect from a bond. Current yield is a bond's annual income divided by the current price of the security. Horizon yield is the total return when a bond is sold prior to maturity. To Discuss: Bonds of Zello Corporation with a par value of $1000 sell for $960, mature in five years and have a 7% annual coupon rate paid annually. The reasoning for lower yields in this case is to be given. Calculate the: Current Yield Yield to maturity Horizon yield for an investor with a three year holding period and a reinvestment rate of 6% over the period. At the end of three years the 7% coupon bonds with two years remaining will sell to yield 7%.

Question

Want to see the full answer?

Answer 1

Question

Chapter 10, Problem 18PS

Summary Introduction

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. Yield to maturity is defined as the discount rate that makes the present payments from the bond equal to its price. In simple terms, it is the average rate of return a holder can expect from a bond. Current yield is a bond's annual income divided by the current price of the security. Horizon yield is the total return when a bond is sold prior to maturity.

To Discuss:

Bonds of Zello Corporation with a par value of $1000 sell for $960, mature in five years and have a 7% annual coupon rate paid annually. The reasoning for lower yields in this case is to be given.

Calculate the:

Current Yield

Yield to maturity

Horizon yield for an investor with a three year holding period and a reinvestment rate of 6% over the period. At the end of three years the 7% coupon bonds with two years remaining will sell to yield 7%.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

hello tutor:If submitted image is blurr then please comment i will write values. i will give unhelpful please.

Lara Fredericks is interested in two mutually exclusive investments. Both investments cover the same time horizon of 5 years. The cost of the first investment is $9900, and Lara expects equal and consecutive year-end payments of $3400. The second investment promises equal and consecutive payments of $4100 with an initial outlay of $12500 required. The current required return on the first investment is 8.4 %, and the second carries a required return of 10.4 %.a. What is the net present value of the first investment?b. What is the net present value of the second investment?c. Being mutually exclusive, which investment should Lara choose? d. Which investment is relatively more risky? Explain.

What are some of the characteristics of a firm with a long operating cycle?