Question 2 (25 points) A mortgage bond issued by Automation Engineering is for sale for $8,500....

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Answer 1

Answer #1

The semiannual rate of return (YTM) is calculated using RATE function in Excel :

nper = 5 * 2 (5 years to maturity with 2 semiannual coupon payments each year).

pmt = 12000 * 8% / 2 (semiannual coupon payment = face value * coupon rate / 2).

pv = -8500 (Price of bond. This is entered with a negative sign because it is a cash outflow to the buyer of the bond).

fv = 12000 (face value of bond receivable at maturity).

RATE is calculated to be 8.43%. This is the semiannual YTM.

Semiannual YTM is 8.43%.

foc =RATE(5*2,12000*8%/2,-8500, 12000) D E F G B C 1 8.43%

The realized semiannual rate of return is 8.43%.

Answer 2

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