Question

On October 15, 2016, Koala, Inc. issued a 10 year bond (with a typical $1000 face...

On October 15, 2016, Koala, Inc. issued a 10 year bond (with a typical $1000 face value) that had an annual coupon value of $60. [We are assuming that the 2020 coupon has just been redeemed.]

• Initially, the bond was sold for the premium price of $1,025.

• On October 15, 2020, this bond was selling for only $975.

• The market rate of interest for a riskless corporate bond, of this maturity, was 4.5% on October 15, 2016, which reflects market expectations about future rates of inflation.

• The market rate of interest for a riskless corporate bond, of this maturity, was 4.0% on October 15, 2020, which reflects market expectations about future rates of inflation.

Question- What was the yield to maturity for this bond on October 15, 2020?  [To 3 decimal places.]

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Answer #1

Given that the bond was issued on October 15, 2016. So, on October 15, 2020, remainining term to maturity is 6 years. As the frequency is annual ans since the October 2020 coupon has been paid, number of future copupon payments is 6.

YTM is calculated using RATE function of Excel

Yield to maturity on 15, October 2020= 6.516689%

Calculation as below:

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