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Topic: Bonds

 

Learning Objective:

Purpose of this activity is to give understanding of the relationship that exists among yield to maturity, current yield and bond price.

 

Graded Discussion Question:

 

Yield to Maturity (YTM) is the rate of return required on a bond in market. If YTM increases over current yield, it has negative impact on bond price. On the other hand, if YTM decreases than current yield, it positively affects the price.

 

a)      Keeping in view the above mentioned relationship, identify when the bond will be selling at premium and when at discount?

b)     Also discuss why YTM has an inverse relation with bond price?

IMPORTANT NOTE:

Your comments should be supported with proper rationale within the context of YTM and current yield. General comments willNOT be awarded marks.

 

Learning Objective:

After attempting this activity, students will be able to understand the reasoning of relationship that exists between YTM & current yield and effect of this relationship on bond price.

 

Important Instructions:

Ø Post your GDB comments (answer) against GDB # 01 rather than against lessons’ MDB.

Ø Your discussion must be based on logical facts.

Ø Your comments on the topic should not exceed 200 words.

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Ø Obnoxious or ignoble answer should be strictly avoided.

Ø Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

 

Ø For Detailed Instructions, please read the GDB# 01 announcement

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Replies to This Discussion

YTM & Coupon Rate were same Result PV of Bond was exactly equal to the FV YTM greater than Coupon Rate Results PV of the Bond less than the FV YTM lower than Coupon Rate Result PV of the Bond was greater than FV

A Bond will be sold on a discount when YTM is greater than coupon rate. A bond will be sold on premium when YTM is lower than the coupon rate

 See 5 lec to understand this GDB . And also read chp 5 slides 14,15.It will give u ans of this GDB. 

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Attachments:

ans by some other student.(STH)

in short

1. Bond will sell at premium when coupon rate is greater than ytm (ytm is used as the discount rate to find the present value or price; if ytm is lower pv will go up)
2. Bond will sell at discount when coupon rate is lower than ytm
3. Ytm has inverse relationship with price coz  greater the interest rate lower the present value of cash flows 

 

 

ans by some other student.(A.H)

Discount Bond: YTM > Current Yield > Coupon Rate

create your own example and the solutions will help you see the relationship

e.g. Face Value: 1000; Coupon rate 8 %; Years 7; Price 900 (Discount Bond)
First find YTM (using excel or financial calculator)
Then find current yield = 80/900 = 8.88 %
and you know the coupon rate which is 8%
YTM should be greater than 8.88% and 8.88% is obviously greater than 8%. (YTM > 8.88% > 8%)
Similarly for premium bond: coupon rate > current yield > YTM (please correct me if this not so)
 
For examples & more on relationship bw YTM and coupon rate & YTM and current yield - read chapter 7 of the attached book

chap 7 of fundamentals of corporate finance by ross

iqra apky pas ye book ha pdf format ma??? ha tu plz share it

file 5 mb say ziada hai is liye yaha upload ahi ho skti.. ami ap ko link bta dayti hoon waha say download kr lay..

Fundamentals of corporate finance 9ed :

http://www.aep.neu.edu.vn/FileManager/ThuVien/166085925-Ross-Wester...

 Fundamentals of corporate finance 9ed solution manual:

http://harga-promosi.com/sm-tb/SM_Ross_FCF9_wm.rar

thanksss

Please Discuss here about this GDB.Thanks

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions.

  1. If the bond is trading below par (trading at discount) yield to maturity is higher than current yield which is in turn higher than the coupon rate.
  2. If the bond is trading above part (trading at premium) coupon rate is higher than current yield which is in turn higher than the yield to maturity.

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