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Question:
A company has two $1,000 face value bonds outstanding both selling for $701.22. The first issue has an annual coupon of 8% and 20 years to maturity. The second bond has the same yield to maturity as the first bond but has only five years remaining until maturity. The second issue pays interest annually as well. What is the annual interest payment on the second issue?
A
$37.12.
explanation
First find the yield to maturity (YTM) of the first bond and use it in the second bond calculation. The calculator sequence to determine the YTM is: PV = -701.22; FV = 1000; PMT = 80; N = 20; CPT I/Y = 12.00%. We discount the cash flows of the second bond at 12.00%. The calculator steps are: PV = -701.22; FV = 1,000; N = 5; I/Y =12; CPT -> PMT = $37.12.
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