The outstanding bonds of International Plastics mature in 6 years and pay semiannual interest payments of $33.50 on a $1,000 face value bond. The bonds are currently selling for $1,008.64. The coupon rate is ________%, the current yield is ________%, and the yield to maturity is ________%.

Question

Quizplus · Accepted Answer

The coupon rate is calculated as the annual coupon payment divided by the face value of the bond. Since the bond pays semiannual interest of $33.50, the annual payment is $67.00 ($33.50 * 2). Therefore, the coupon rate is $67.00 / $1,000 = 6.7%. The current yield is the annual coupon payment divided by the current market price of the bond, which is $67.00 / $1,008.64 = 6.64%. The yield to maturity (YTM) calculation is more complex and involves solving for the rate that equates the present value of all future cash flows (coupon payments and the face value repayment at maturity) to the current price of the bond. Given the choices, the YTM closest to the scenario described, considering the bond is selling slightly above its face value (indicating a YTM slightly below the coupon rate), is 6.52%.

The Outstanding Bonds of International Plastics Mature in 6 Years