1) A 10-year corporate bond has a coupon rate of 6% with annual
payments. If the current value of the bond in the marketplace is
$900, then what is the Yield-to-Maturity (YTM)?
2) A 10-year corporate bond has a coupon rate of 6% with annual
payments. If the current value of the bond in the marketplace is
$1100, then what is the Yield-to-Maturity (YTM)?
3) A 10-year corporate bond has a coupon rate of 6% with
semi-annual payments. If the current value of the bond in the
marketplace is $900, then what is the Yield-to-Maturity (YTM)?
1)
Yield to maturity of a bond is the internal rate of return earned by investor.
Bond price is the initial year cash outflow.
Periodic cash flow = Face value x coupon rate = $1,000 x 0.06 = $ 60
Last period cash flow = Face value + coupon amount = $ 1,000 + $ 60 = $ 1,060
IRR can be computed using excel as:
A |
B |
|
1 |
Year |
Cash flow |
2 |
0 |
$ (900) |
3 |
1 |
$ 60 |
4 |
2 |
$ 60 |
5 |
3 |
$ 60 |
6 |
4 |
$ 60 |
7 |
5 |
$ 60 |
8 |
6 |
$ 60 |
9 |
7 |
$ 60 |
10 |
8 |
$ 60 |
11 |
9 |
$ 60 |
12 |
10 |
$ 1,060 |
13 |
IRR |
7.45% |
If above table is excel sheet, use formula “=IRR(B2:B12) in cell B13 to get IRR as 14.96%
Yield -to-Maturity of the bond is 7.45 %
2)
Yield to maturity of a bond is the internal rate of return earned by investor.
Bond price is the initial year cash outflow.
Periodic cash flow = Face value x coupon rate = $1,000 x 0.06 = $ 60
Last period cash flow = Face value + coupon amount = $ 1,000 + $ 60 = $ 1,060
IRR can be computed using excel as:
A |
B |
|
1 |
Year |
Cash flow |
2 |
0 |
$ (1,100) |
3 |
1 |
$ 60 |
4 |
2 |
$ 60 |
5 |
3 |
$ 60 |
6 |
4 |
$ 60 |
7 |
5 |
$ 60 |
8 |
6 |
$ 60 |
9 |
7 |
$ 60 |
10 |
8 |
$ 60 |
11 |
9 |
$ 60 |
12 |
10 |
$ 1,060 |
13 |
IRR |
4.72% |
If above table is excel sheet, use formula “=IRR(B2:B12) in cell B13 to get IRR as 4.72%
Yield -to-Maturity of the bond is 4.72 %
3)
Yield to maturity of a bond is the internal rate of return earned by investor.
Bond price is the initial year cash outflow.
Periodic cash flow = Face value x coupon rate = $1,000 x 0.06/2 = $ 1,000 x 0.03 = $ 30
Last period cash flow = Face value + coupon amount = $ 1,000 + $ 30 = $ 1,030
IRR can be computed using excel as:
A |
B |
|
1 |
Period |
Cashflow |
2 |
0 |
$ (900) |
3 |
1 |
$ 30 |
4 |
2 |
$ 30 |
5 |
3 |
$ 30 |
6 |
4 |
$ 30 |
7 |
5 |
$ 30 |
8 |
6 |
$ 30 |
9 |
7 |
$ 30 |
10 |
8 |
$ 30 |
11 |
9 |
$ 30 |
12 |
10 |
$ 30 |
13 |
11 |
$ 30 |
14 |
12 |
$ 30 |
15 |
13 |
$ 30 |
16 |
14 |
$ 30 |
17 |
15 |
$ 30 |
18 |
16 |
$ 30 |
19 |
17 |
$ 30 |
20 |
18 |
$ 30 |
21 |
19 |
$ 30 |
22 |
20 |
$ 1,030 |
23 |
IRR |
3.72% |
If above table is excel sheet use formula “=IRR(B2:B22) in cell B23 to get IRR as 3.72%
Yield -to-Maturity of the bond = 3.72 % x 2 = 7.44 %
1) A 10-year corporate bond has a coupon rate of 6% with annual payments. If the...
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