Question

A bond with face value of KD 2000 is purchased for KD 1800. The bond payments are made on semi annual basis with an coupon rate of 6 % The bond matures in 8 years .

a) Draw cash flow diagram of the bond.

b) Calculate the bond current yield

c) Calculate yield to maturity interest rate. (Show all calculation with trial and error)

Answer 1

Refer the attached picture below for cash flow diagram

B.

C. The present value of the bond can be written as

Here, F = 2000, C = 120, n = 8

Let us assume i=8%

On solving

P = KD 1,766.954

But the price is KD 1800 so reduce rate. Let us assume rate =4%

P = KD 2,000

Now we can determine IRR using linear interpolation technique as follows

YTM = 6 + 1.716399

YTM = 7.72%

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