Question

A bond with 10 years left to maturity currently sells for 90% of par value. If the bond makes a $60 annual coupon payment, then the bond must have a YTM greater than what percentage rate?

Answer 1

Answer : Calculation of Yield to Maturity of Bond :

Yield to maturity can be calculated using RATE function of Excel :

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years to left maturity i.e 10

pmt is Interest payment i.e 60

pv is Current Market Price

= 900 (1000 * 90%)

Note : pv should be taken as negative.

fv is face value i.e 1000

=RATE(10,60,-900,1000)

therefore ,Yield to Maturity is 7.45%

Then we can say that Yield to maturity will be grater than its coupon Rate as the bond is trading at discount.