Someone asked for help with a financial problem. Generally, I know how to solve the problem. But some of the terminology does not jibe with my (weak) understanding of bond terminology.
The facts of the user's problem as stated: "A corporate bond has a face value of $1000 and an annual coupon interest rate of 6%. Interest is paid annually. 12 years of the life of the bond remain. The current market price of the bond is $1027, and it will mature at $1100."
What does not make sense to me is "face value of $1000" v. "will mature at $1100".
The wiki/Face_value page [1] says: "The face value of bonds usually represents the [...] redemption value. [....] As bonds approach maturity, actual value approaches face value".
I thought "redemption value" is the amount to be paid at maturity (plus any accrued interest).
But the wiki/Redemption_value[2] cites a
That would suggest that the redemption value is __not__ the face value. (?!)
(Then again, I thought call price and redemption value are two separately-stated terms of a bond.)
Moreover, the
So for the bond terms in the user's problem above, would the YTM be the IRR of the following annual cash flows: -1027, 60 {11 times}, 60+1100?
(I thought the interest coupon would be $66: 6% of $1100.)
Compounding my confusion is the fact that the
For user's problem above, that would suggest that $1000, not $1100, is the amount that the bond will "mature at", contrary to the facts of the problem above. (?!)
Can anyone clarify the terms "face value", "redemption value" and "value at maturity" so they are consistent with the cited definition as well as the user's problem above?
Or is one (or both) misusing the terminology?
The bottom line is: how to compute the YTM based on the facts of the user's problem?
I know that the YTM is the IRR of "some" cash flows. But the individual cash flows are unclear to me because I am confused about the terminology.
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