Question

For the following, assume the normal case that bond coupons are semi-annual a) What is the yield to maturity (YTM) on a 11-year, 6.4% coupon bond if the bond is currently selling for $1,000? (Assume semi-annual coupons) 1% b) What is the YTM on the above bond if the value today is $925 637 % c) For the bond in a) above, what is your realized (actual) EAR it immediately after you purchase the bond market rates, and the rate at which you can reinvest coupons, change to 6 2% and you hold the bond for 5 years and then sell? (remember, coupons and compounding are semi-annual) %

Answer 1

Solution:-

Nper = 11 years * 2 = 22

PMT =

1. 000 +0.064 2

PMT = $32

Assume FV is $1,000

To Calculate YTM if Bond is selling at $1,000-

А B 1 2 Bond YTM Semi Annually 3 4 5 6 Nper Pmt Pv 22 32 -1000 1000 7 FV 00 9 YTM 3.20% 10 11 Formula Rate(B4,B5,B6,B7)

Annual YTM = 3.20% * 2

Annual YTM = 6.40%

To Calculate YTM if Bond is selling at $925.63-

A B 1 2. Bond YTM Semi Annually 3 4 22 Nper Pmt 5 32 6 Pv -925.63 7 FV 1000 8 9 YTM 3.70% 10 11 Formula Rate(B4,B5,B6,B7) 12

Annual YTM = 3.70% * 2

Annual YTM = 7.40%

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