Question

Homework: Chapter 6 Homework 11 of 14 (6 complete) HW Score: 35.71%, 5 of 14 pts Score: 0 of 1 pt P6-20 (similar to) Question Help Treasury notes and bonds. Use the information in the following table: Assume a $100.000 par value. What is the yield to maturity of the August 2006 Treasury bond with semiannual payment? Compare the yield to maturity and the current yield. How do you explain this relationship? What is the yield to maturity of the August 2006 Treasury bond? Round to three decimal places)

Answer 1

To find the YTM, we need to put the following values in the financial calculator:

N = 8.5 * 2 = 17;

PV = -92.95%*100,000 = -92,950;

PMT = (3.75%/2) * 100,000 = 1,875;

FV = 100,000;

Press CPT, then I/Y, which gives us 2.38

So, Periodic Rate = 2.38

YTM = Periodic Rate * No. of compounding periods in a year = 2.38% * 2 = 4.77%

The relationship between the current yield and YTM for discount bonds is that the current yield is less than the YTM.