Chapter 6, Problem 15CTCR

a)

Summary Introduction

To determine: The relationship that exists between the yield to maturity and the bond price.

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.

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)

Summary Introduction

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)

Summary Introduction

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.