Question

I can't use excel and need to find the step-by-step calculations for the following question:

Prudential Inc., has a 10% Coupon bond maturing in 8 years selling for $616.32. What is the bond's yield?

Answer 1

A bond's yield can be find using a financial calculator and approximate formula;

Assuming the face value of bond to be $1000

Coupon = 0.1 * 1000 = 100

Yield of bond using a financial calculator = 19.99 or 20%

Keys to use in a financial calculator: PMT 100, FV 1000, PV -616.32, N 8, CPT I/Y

Yield of bond using approxiamte formula:

[Coupon + ( face value - price)/n] / ( face value + price) / 2

yield = [ 100 + ( 1000 - 616.32)/8] / ( 1000 + 616.32) / 2

yield = [ 100 + 47.96 ] / 808.16

yield = 0.1831 or 18.31

Please note: There will be variations in financial calculator and approxomate method. Best practise is to use the yield from financial calculator method as it is the exact yield.