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Aziz works for a broker. One of his clients is offered a bond at $1,050. It is

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Aziz works for a broker. One of his clients is offered a bond at $1,050. It is a 10%, 15-year bond with a par value of $1,000 and a call price of $1,100. (The bond’s first call date is in five years.) Coupon payments are made semiannually.
a. Find the current yield, YTM, and YTC on this issue. Which of these three yields is the highest? Which is the lowest? Which yield would Aziz use to value this bond? Explain.
b. Assume that the price of the bond declines to $875. Now which yield is the highest? Which is the lowest? Which yield would Aziz use to value this bond? Explain.

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A Price Yield to Maturity Yield to Call N 40 N 10 PV 1100 PV 1100 PMT 4250 ...View the full answer


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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.

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