A General Power bond carries a coupon rate of 8.2%, has 9 years until maturity, and sells at a yield to maturity of 7.2%. (Assume annual interest payments.) a. What interest payments do bondholders receive each year? b. At what price does the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What will happen to the bond price if the yield to maturity falls to 6.2%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. If the yield to maturity falls to 6.2%, will the current yield be less, or more, than the yield to maturity?

Answer and Explanation:

The computation of interest payments is shown below:-

Let us assume the par value be $1,000

1. Interest payment = $1,000 × Coupon rate

= $1,000 × 8.2%

= $82

2.

The computation of sold bond is shown below:-

Sold bonds = 1,000 × coupon rate ÷ Yield to maturity × (1 - 1 ÷ 1.072^number of years) + 1,000 ÷ 1.072^number of years

= 1,000 × 8.2% ÷ 7.2% × (1 - 1 ÷ 1.072^9) + 1000 ÷ 1.072^9

= $1,064.601613

3.

The computation of the bond price is shown below:-

= 1000 × 8.2% ÷ 6.2% × (1 - 1 ÷ 1.062^9) + 1,000 ÷ 1.062^9

= 1134.857572

So, the price increases by $70.25595933

4.

The current yield is more than the yield to maturity.

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