(a)(1)-Yield to Maturity of the Bond if the Current Market price is $869
· The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
· The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
· The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)
Variables |
Financial Calculator Keys |
Figure |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 9.00%] |
PMT |
90 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity Period/Time to Maturity [4 Years] |
N |
4 |
Bond Price/Current Market Price of the Bond [-$869] |
PV |
-869 |
We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity (1/Y) on the bond = 13.44%.
“Yield to Maturity of the Bond if the Current Market price is $869 = 13.44%”
(a)(2)-Yield to Maturity of the Bond if the Current Market price is $1,081
Variables |
Financial Calculator Keys |
Figure |
Par Value/Face Value of the Bond [$1,000] |
FV |
1,000 |
Coupon Amount [$1,000 x 9.00%] |
PMT |
90 |
Market Interest Rate or Yield to maturity on the Bond |
1/Y |
? |
Maturity Period/Time to Maturity [4 Years] |
N |
4 |
Bond Price/Current Market Price of the Bond [-$1,081] |
PV |
-1,081 |
We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity (YTM) on the bond = 6.63%.
“Yield to Maturity of the Bond if the Current Market price is $1,081 = 6.63%”
(b)-DECISION
(I). “YES”. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
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