Question

1. What is the yield on a 18-year bond that pays a semi-annual coupon of $9 and sells for $1000. Answer as a percent.

2. You are looking at a 9-year zero-coupon bond that has a yield to maturity of 1.4% . What is the value of the bond? Assume semi-annual compounding.

Answer 1

1.

Coupon = $9

Face Value/ Redemption Value = $1000

Current Price = $100

Semi Annual Yield = (Coupon/Interest +( Face Value - Price)/period)/ (Face Value +Price)/2 = (9+ (1000-1000)/18 )(1000+1000)/2 = 9/1000 =0. 9%

Yield = 0.9% *2 =1.8%

Yield = 1.8% p.a

2

Years= 9-year

Type = zero-coupon bond

Yield to maturity = 1.4% .

Semi annual yield = 1.4/2 = 0.7%

Period = 9×2 =18

Face Value = 1000(assumed)

Value of the bond = 1000/(1.007)^18 = $882

Value of Zero-coupon bond = $882