Question

What is the estimated yield using the below information?

UST Yield Curve Data Par Value: 100.00 Pmt Frequency 2.00 per year Trade Date: 14-Mar-2020 Settlement Date: 15-Mar-2020 Benchmark Bond Prices Period Maturity 15-Sep-2020 15-Mar-2021 15-Sep-2022 15-Sep-2023 15-Mar-2025 Coupon (s.a.) 1.200% 1.350% 2.550% 2.750% 3.600% Par Value (%) 100.000 100.000 100.000 100.000 100.000 Price (% of Par) 100.000 99.000 96.000 95.000 92.000

Answer 1

The formula for calculating yield to maturity is as follows:

Par Value - Market Price Annual Interest + Number of Years to Maturity Yield to Maturity = – Par Value + Market Price

Market Price is Price (% of Par)

For 1 period: On par value of Rs 100, 1.2 dividends will be paid semi-annually. So Annual Interest will be 1.2 * 2 = 2.4 .

The number of years to Maturity will 6 months as the settlement date is 15 Mar 2020 and maturity is 15 Sep 2020.

Yield to Maturity = (2.4 + ((100-100)/ 6/12) ) / ((100+100)/2) = 2.4 / 100 = 0.024 i.e. 2.4 %.

For 2 period, On par value of Rs 100, 1.35 dividend will be paid semi-annually. So Annual Interest will be 1.35 * 2 = 2.7

The number of years to Maturity will 1 year as the settlement date is 15 Mar 2020 and maturity is 15 Mar 2021.

Yield to Maturity = (2.7 + ((100-99)/1))/((100+99)/2) = 3.7 / 99.5 = 0.03718 = 3.72%

For 5 period . On par value of Rs 100, 2.550 dividend will be paid semi-annually. So Annual Interest will be 2.550 * 2 = 5.1

The number of years to Maturity will 2.5 year as the settlement date is 15 Mar 2020 and maturity is 15 Sep 2022.

Yield to Maturity = (5.1+((100-96)/2.5))/((100+96)/2) = 6.7 / 98 = 0.068367 = 6.84%

For 7 period . On par value of Rs 100, 2.750 dividend will be paid semi-annually. So Annual Interest will be 2.750 * 2 = 5.5

The number of years to Maturity will 3.5 year as the settlement date is 15 Mar 2020 and maturity is 15 Sep 2023.

Yield to Maturity = (5.5 +((100-95)/3.5))/((100+95)/2) = 6.928/97.5 = 0.07105 = 7.11%

For 10 period . On par value of Rs 100, 3.6 dividend will be paid semi-annually. So Annual Interest will be 3.60 * 2 = 7.2

The number of years to Maturity will 5 years as the settlement date is 15 Mar 2020 and maturity is 15 Mar 2025

Yield to Maturity = (7.2+((100-92)/5))/((100+92)/2) = 8.8/ 96 = 0.09166 = 9.17%