Question

If the Note is trading at 102.25, the yield to maturity of the Step-Up Note is:

18. A Step-Up Note is a type of bond with a coupon rate that increases over time according to a contractual schedule as shown below. The Note pays coupons semi-annually on June 15 and December 15 and has a term to maturity of 6 years Assume today is June 15 so there is exactly 6 months to the next coupon on December 15. The Step-Up Note differs from the typical bond because the coupons cannot be treated as an ordinary annuity (a fixed cash flow for a limited term) so the PMT key on the calculator cannot be used. The Note is a semi-annual series of unequal cash flows for a limited time period. 6 Year Coupon | Dates: Coupon 1 2 15-Dec-19 15-Dec-20 15-June-2015-June-21 3.00% 3.50% 4 1 5-Dec-21 | 15-Dec-22 15-June-22 | 15-June-23 4.00% 4.50% 5 15-Dec-23 | 15-June-24 5.00% 15-Dec-24 15-June-25 5.50% If the Note is trading at 102.25, the yield to maturity of the Step-Up Note is: [Do this AFTER the Project Analysis discussions] a. b. c. 1.89% 2.13% 3.47% 3.77% 4.25%

Answer 1

Face Value of the Note is assumed as $100.

Using the IRR function of Excel, YTM is arrived at 3.77%. Hence the answer is option d.

Working as follows:

B _ D17 - fx EIRR(D4:016) E F G 1 Face Value (FV)= $100 Price= $102.25 2 Date Coupon Rate Coupon Amount CF (R) =FV*(R/2) 15-Jun-19 -$102.25 Price 15-Dec-19 3.00% $1.50 $1.50 Coupon 15-Jun-20 3.00% $1.50 $1.50 Coupon 15-Dec-20 3.50% $1.75 $1.75 Coupon 15-Jun-21 3.50% $1.75 $1.75 Coupon 15-Dec-21 4.00% $2.00 $2.00 Coupon 15-Jun-22 4.00% $2.00 $2.00 Coupon 15-Dec-22 4.50% $2.25 $2.25 Coupon 15-Jun-23 4.50% $2.25 $2.25 Coupon 15-Dec-23 5.00% $2.50 $2.50 Coupon 15-Jun-24 5.00% $2.50 $2.50 Coupon 15-Dec-24 5.50% $2.75 $2.75 Coupon 15-Jun-25 5.50% $2.75 $102.75 Coupon+ FV redemption 17 IRR 1.886490%! 18 YTM=IRR*2 (Because the casf flows are semiannual) 3.77% 19