Things you need to know:
Price = PV of all coupon payments + PV of par value
Par value = face value = maturity value, assume $1000 unless otherwise given Coupon rate = annual coupon/par value
Current yield = annual coupon/price
YTM = discount rate that equates all cash flows to price Relationship between rates and values are as follows:
If coupon rate = current yield = YTM, then price = par
If coupon rate > current yield > YTM, then price > par Þ a premium bond If coupon rate < current yield < YTM, then price < par Þ a discount bond
Price A $1000 par value bond will mature in 10 years. This bond pays a coupon of $90 every year. If investors require an annual return of 8%, what is the current price of this bond? Assume annual payments.
Price You wish to purchase a 20-year bond that has a maturity value of $1000 and makes semi-annual interest payments of $40. If you require a 10% yield to maturity on this investment, what is the maximum price you would pay for the bond?
Price A bond with a $1,000 par value pays a coupon of $40 every six months. The bond has years until maturity and a required return of 8%. If the required return suddenly dropped to 6%, what would be the percentage change in the bond’s price?
Coupon rate You can purchase a $1000 face value bond with 15 years to maturity for $1124. The bond pays a semi-annual coupon. The market requires a return of 8% on similar bonds. What is the coupon rate?
Current yield Suppose you read in The Wall Street Journal that a bond with face value of $100 has an annual coupon rate of 9% and a price of $71. What is the bond's current yield?
Yield to maturity A zero-coupon bond has 10 years until maturity, $1000 face value, and a current price of $322. Assuming annual compounding, what is the yield to maturity?
Yield to maturity Moe’s Inc. has bonds outstanding with a par value of $1000 and 10 years to maturity. These bonds pay a coupon of $45 every six months. Current market conditions are such that the bond sells for $938. Calculate the yield to maturity on the issue.
Duration A newly issued 5-year Altec Corp. bond has a price of $1,095.99, a par value of $1,000, and pays annual interest at a 12% coupon rate. Find the duration of the bond.