Question

A bond for a company has a par value of $100 and matures on 2 December 2019. It has a price of $113.191 on 31 July 2014 and pays a coupon rate of 6.125%. What is the yield on this bond?

(1) 6.125%.

(2) 5.41%.

(3) 13.191%.

(4) $13.19.

Answer 1

Par/Face value	100
Annual Coupon rate	0.06125
Annual coupon	6.125
Present Value = Future value/ ((1+r)^t)
where r is the interest rate and t is the time period
price of the bond = sum of present values of future cash flows
price of the bond	113.191
Use excel to find r
r	0.06125
mt	1	2	3	4	5
future cash flow	6.125	6.125	6.125	6.125	106.125
present value	5.771496	5.438394	5.124518	4.828756	78.83684
sum of present values	100.00
When the yield on this bond is 6.125% then the price of the bond is 100 (the par value).
The yield has to be less than 6.125% if the price of the bond is 113.91.
2) 5.41%.