Question

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

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)

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%

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