Question

1. A 10-year corporate bond has a coupon rate of 9% with annual payments. If the current value of the bond in the marketplace is $900, then what is the Yield-to-Maturity (YTM)?

Answer 1

We know that,

Price of bond = Present value of all the annual coupon amount and face value discounted at ytm

Face value = 1000

Annual coupon = 9% * 1000 = 90

Price = 900

Number of payments = 10

900 = 90/(1+ytm)^1 + 90/(1+ytm)^2 + 90/(1+ytm)^3 + 90/(1+ytm)^4 + 90/(1+ytm)^5 + 90/(1+ytm)^6 + 90/(1+ytm)^7 + 90/(1+ytm)^8 + 90/(1+ytm)^9 + 90/(1+ytm)^10 + 1000/(1+ytm)^10

We will use heat and trial method to get that value for which above equation satisfy.

Ytm = 10.67% Answer

Or Using Financial Calculator:

N = 10

PMT = 90

FV = 1000

PV = -900

CPT I/Y

I/Y = YTM = 10.67% Answer