Question

Ten years ago, Simply Splendid Corp. issued 40 year bonds with a $1,000 face value and a 7

percent coupon rate, paid semiannually. Bond of this risk currently have a yield to maturity of 9

percent. How much would you expect to pay for one of these bonds today?

Harley Group has outstanding $1,000 face value bonds that have a 6.5 percent coupon rate, paid

semiannually, and mature in 18 years. They are currently selling for $935.15. What is their yield

to maturity?

Answer 1

Simply Splendid Corporation Bond.

Current value is $793.62 calculated using PV function of Excel as follows:

D13 a =PV(D12,09,D10,D2)*-1 B C Function 1 Formula arguments Values 2 Face Value (FV) Given Fv $1,000 3 Coupon rate (R) Given 7.00% 4 Interest frequency Given Semi annual 5 Number of coupon payments a year (n) 6 Original term (T) Given 40 7 Priod expired (years) (t) Given 10 8 Time to maturity (no. of years) (N) T-t 30 9 Number of future coupon payments N*n Nper 60 10 Amount of coupon payment FV*R/n PMT $35.00 11 Interest rate (YTM) Given 9.00% 12 Interest rate per period YTM/n Rate 4.50% 13 Price (Present value) PV $ 793.62 14

Harley Group bond.

Yield to Maturity (YTM) is 7.145938% calculated using RATE function of Excel as follows:

A D 2 D12 f =RATE(D9,D10,D11*-1,D2)*D5 B Function 1 Formula arguments Values 2 Face Value (FV) Given $1,000.00 3 Coupon rate (R) Given 6.5% 4 Interest frequency Given Semi annual 5 Number of coupon payments a year (n) 6 Original term (T) Given 18 7 Priod expired (years) (t) Given 8 Time to maturity (no. of years) (N) T-t 9 Number of future coupon payments N*n Nper 36 10 Amount of coupon payment FV*R/n PMT $32.50 11 Price (Present value) PV PV $935.15 12 Interest rate (YTM) 7.145938% 13. RATE