Question

answer the following questions

Treasury notes and bonds. Use the information in the following table. Today is February 15, 2008. Price (per $100 par value) Maturity Issue Coupon Current Type Rating YTM Date Date Yield Rate Bond Aug 2000 86.51 4.75% 8-15-2010 5.491% AAA Assume a $100,000 par value. What is the yield to maturity of the August 2000 Treasury bond with semiannual payment? Compare the yield to maturity and the current yield. How do you explain this relationship?

Answer 1

The YTM is calculated using the RATE function in Excel with these inputs :

nper = 5 (5 semiannual coupon payments until maturity)

pmt = 100,000 * 4.75% / 2 (semiannual coupon payment = par value * annual coupon rate / 2). this is entered as a positive value because it is a cash inflow to the bondholder

pv = -86.51 / 100 * 100,000 (price of bond today. this is entered as a negative value because it is a cash outflow to the buyer of the bond)

fv = 100,000 (par value receivable on redemption. this is entered as a positive value because it is a cash inflow to the bondholder)

RATE is calculated to be 5.54%. This is the semiannual YTM. To convert into annual YTM, we multiply by 2

YTM = 11.07%

The YTM is higher than current yield as it is a discount bond. Current yield is coupon payment / bond price.