Question

A two-year bond with par value $1,000 making annual coupon payments of $91 is priced at $1,000.

a. What is the yield to maturity of the bond? (Round your answer to 1 decimal place.)

YTM =

b. What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be (a) 7.1%, (b) 9.1%, (c) 11.1%?(Do not round intermediate calculations. Round your answers to 2 decimal places.)
(a)

(b)

(c)

Answer 1

a). To find the YTM, we need to put the following values in the financial calculator:

INPUT	2		-$1,000	$91	$1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT		9.1%

b). Realized Compound YTM = (Vt / V0)^1/t - 1

(a). Vt = Coupon(1 + ytm) + [Coupon + Maturity Value]

= $91(1.071) + $1,091 = $97.46 + $1,091 = $1,188.461

Realized Compound YTM = [$1,188.461/$1,000]^1/2 - 1 = 1.0902 - 1 = 0.0902, or 9.02%

(b). Vt = Coupon(1 + ytm) + [Coupon + Maturity Value]

= $91(1.091) + $1,091 = $99.281 + $1,091 = $1,190.281

Realized Compound YTM = [$1,190.281/$1,000]^1/2 - 1 = 1.091 - 1 = 0.091, or 9.10%

(c). Vt = Coupon(1 + ytm) + [Coupon + Maturity Value]

= $91(1.111) + $1,091 = $101.101 + $1,091 = $1,192.101

Realized Compound YTM = [$1,192.101/$1,000]^1/2 - 1 = 1.0918 - 1 = 0.0918, or 9.18%