Question

Attempts: 2. Problem 7.02 Keep the Highest: V2 Click here to read the eBook: Bond Yields Problem Walk-Through YIELD TO MATURITY AND FUTURE PRICE A bond has a $1,000 par value, 20 years to maturity, and a 8% annual coupon and sells for $1,110. a. What is its yield to maturity (YTM)? Round your answer to two decimal places. b. Assume that the yield to maturity remains constant for the next 3 years. What will the price be 3 years from today? Do not round intermediate calculations. Round your answer to the nearest cent. Grade It Now Save & Continue A. Continue without saving

Answer 1

a). To find the YTM, we need to put the following values in the financial calculator:

N = 20;

PV = -1110;

PMT = 8%*1000 = 80;

FV = 1000;

Press CPT, then I/Y, which gives us 6.96

So, YTM = 6.96%

b). Bond's Market Value = PV of Coupon Payment + PV of Maturity Value

= [Periodic Coupon Payment * {(1 - (1 + r)^-n) / r}] + [Face Value / (1 + r)^n]

= [{8%*$1,000} * {(1 - (1 + 0.0696)^-(20-3)) / (0.0696)}] + [$1,000 / {1 + 0.0696}^(20-3)]

= [$80 * {0.6816 / 0.0696}] + [$1,000 / 3.1411]

= [$80 * 9.787] + $318.36

= $782.98 + $318.36 = $1,101.34