Question

25)

a 3 year discount bond with a face value of $500 and sale price of $200.

a)calculate yield to maturity.

a coupon bond with face value of $200 and sale price of $200

b)calculate coupon rate if market demands a yield to maturity for coupon bond that equals the yield to maturity of discount bond

Answer 1

25.) Solution--

a.) YTM (market interest rate) = ?

Face Value (FV) = $500

Sales Price (PV) = $200

Number of periods = 3 years

PMT = 0 (Since zero coupon bond are always trade at discount)

YTM can be calculated in excel using function RATE. So this would be =RATE(nper,PMT,PV,FV)

=RATE(3,0,-200,500) = 36%

b.) As given YTM of coupon bond equals to YTM of discount bond which is 36% as calculated above.

If the face value and current selling price is equal then coupon rate should be equal to YTM.

Hence coupon rate will be 36%.

=PMT(rate,nper,PV,FV)

=PMT(36%,3,-200,200) = $72 which is 36% of $200 (face value)