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14 August, 07:51

A bond with face value $1,000 has a current yield of 6% and a coupon rate of 8%. a. If interest is paid annually, what is the bond's price? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Is the bond's yield to maturity more or less than 8%? More Less

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  1. 14 August, 10:40
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    a. Price of Bond is $1,333.33

    b. Less

    Explanation:

    a.

    Current yield is the ratio of coupon payment to the market value of the bond. It is the rate of income received from bond at current market rate.

    As given

    Coupon Payment = $1,000 x 8% = $80

    Current Yield formula is as follow

    Current Yield = Coupon Payment / Market Value

    6% = $80 / Market Value

    Market Value = $80 / 6%

    Market Value = $1,333.33

    b.

    As we know that

    if Price > Face value then YTM < Coupon rate

    if Price Coupon rate

    if Price = Face value then YTM = Coupon rate

    According to given condition

    $1,333.33 > $1,000 then YTM < 8%

    The bond's yield to maturity is less than 8%.
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