Consider a firm that has a bond on issue with a par value of $1,000 paying a
Question:
Consider a firm that has a bond on issue with a par value of $1,000 paying a 10% coupon rate (with semi-annual payments). The firm just paid a coupon (that is, investors who buy the bond today will not receive the coupon just paid). The bond was issued many years ago and still has 20 years remaining to maturity. The current required rate of return for holders of this bond is 15% per year.
(a). What is the value of this bond today?
(b). What would be the value of this bond if, rather than the firm having just paid a coupon, the firm is about to make a coupon payment today (that is, investors who buy the bond today will also receive the coupon paid today)?
(c). What is the current yield of the bond from part (a)? Why is it different to the yield to maturity and what is the relation to the capital gains part of return?
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta