Question

Question 2 A firm issues a bond today with a $1,000 face value, an 8% coupon interest rate, and a 25-year maturity. An investor purchases the bond for $1,000. (2.1) What is the yield to maturity (YTM)? Explain. (2.2) Suppose the investor bought the bond described previously for $900. What is the YTM? (2.3) Suppose the bond described previously has a price of $1,100 five years after it is issued. What is the YTM at that time?

Answer 1

2.1

As bond is purchased at par value,

YTM = Coupon Rate

YTM = 8%

2.2

Calculating YTM,

Using TVM Calculation,

I = [PV = -900, FV = 1,000, PMT = 80, N = 25]

I = 9.02%

YTM = 9.02%

2.3

Calculating YTM,

Using TVM Calculation,

I = [PV = -1,100, FV = 1,000, PMT = 80, N = 20]

I = 7.05%

YTM = 7.05%