Asked by Sofia Avelar on Apr 24, 2024
Verified
If a $1,000, 8% coupon rate bond currently sells for $627.76 and has 15 years remaining to its maturity, what is the bond's and the market's yield?
A) 8.00%
B) 14.00%
C) 7.00%
D) 16.00%
Coupon Rate
The annual percentage yield of a bond in relation to its face amount.
Yield to Maturity
The expected total yield on a bond when held until it reaches its date of maturity.
- Acquire a comprehension of the principles involved in bond valuation and how bond prices and yields are affected by market conditions.
Verified Answer
OG
oNHunT33 gaming6 days ago
Final Answer :
B
Explanation :
The bond's yield, or yield to maturity (YTM), can be found using the bond pricing formula, which equates the present value of the bond's future cash flows (interest payments and the principal repayment) to its current price. Given the bond's current price is significantly lower than its face value and it pays an 8% coupon rate, the YTM must be higher than the coupon rate to justify the lower price. The correct YTM is 14.00%, indicating the market requires a higher return due to increased risk or higher interest rates compared to the bond's coupon rate.
Learning Objectives
- Acquire a comprehension of the principles involved in bond valuation and how bond prices and yields are affected by market conditions.