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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?
Your comments should be supported with proper rationale within the context of YTM and current yield. General comments willNOT be awarded marks.
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.
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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.
ans by some other student.(STH)
ans by some other student.(A.H)
create your own example and the solutions will help you see the relationship
chap 7 of fundamentals of corporate finance by ross
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Fundamentals of corporate finance 9ed :
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