FYI bonds have a par value of $1,000. The bonds pay $40 in interest every six months and will mature in 10
years.
a. Calculate the price if the yield to maturity on the bonds is 7, 8, and 9 percent, respectively.
b. Explain the impact on price if the required rate of return decreases.
c. Compute the coupon rate on the bonds. How does the relationship between the coupon rate and the yield to
maturity determine how a bond's price will compare to it par value?
a. 7% YTM price = $1,071.06
8% YTM price = $1,000.00
9% YTM price = $934.96
b. The price of the bond will increase.
c. Coupon rate = ($40 × 2)/$1,000 = 8%
A bond with a YTM above the coupon rate will sell at a discount (below par value). The investor will pay less than the
par value for the bond, but will receive its par value at maturity. This built-in gain drives the investor's return up
above the coupon rate. If the coupon rate equals the YTM, the bond will sell for its par value. If the YTM is below the
coupon rate, the coupons are attractive thus an investor will pay more than the par value for the bond.
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