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Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on this bond

Respuesta :

Kolawole845

Answer:

Cost of debt=  8.34%

Explanation:

The yield to maturity to Maturity can be used to work out the cost of debt using the formula below:

YM =( C + F-P/n) ÷ ( 1/2× (F+P))

C- annual coupon,  

F- face value ,

P- current price,  

n- number of years to maturity

YM - Yield to maturity

C- 7%× 1000 =70 , P= 927.23,  F- 1000

AYM = 70 + (1000-927.23)/7÷ 1/2× (1000+927.23)

=  80.39571429 ÷   963.615

= Yield to maturity = 8.34%

Cost of debt=  8.34%

chilljain33

The correct statement will be that the current market yield on such a bond having an annual coupon rate of seven percent and selling for $927.23 will be around 8.34%.

Calculation of market yield can be done by applying the values available in the information given above to the appropriate formula for calculation of market yield.

Market yield

  • The computation of market yield can be done with the help of the following formula,

  • [tex]\rm Market\ Yield= \dfrac{Coupon\ rate\ + Face\ Value- Current\ Price}{\dfrac{1}{2}\ x\ Face\ value\ + Current\ Price}\\ [/tex]

  • Applying the available values to the given formula,

  • [tex]\rm Market\ Yield= \dfrac{\dfrac{(0.07\ x\ 1000)}{7}}{\dfrac{1}{2}\ x\ (1000+927.23)}\\ \\\\ \rm Market\ Yield= \dfrac{80.39}{963.61}\\ \\\\ \rm Market\ Yield= 0.0834[/tex]

  • So, the cost of debt is computed as 8.34%.

Hence, the market yield of the bond with 7% coupon rate and market current price of $927.23 is 8.34%.

Learn more about market yield here:

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