Question

Jed is considering purchasing a 11% bond that has 9 years to maturity. Jed’s required return...

Jed is considering purchasing a 11% bond that has 9 years to maturity. Jed’s required return on the bond is 10.1% and he has been offered the bond at a price of $1,124. What excess return does the bond offer Jed?

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Answer #1

YTM is calculated using RATE function in Excel :

nper = 9 (years remaining until maturity with 1 annual coupon payment each year)

pmt = 1000 * 11% (annual coupon payment = face value * coupon rate)

pv = -1124 (Current price of bond. This is entered with a negative sign because it is a cash outflow to buy the bond today).

fv = 1000 (face value of bond receivable at maturity).

RATE is calculated to be 8.94%. This is the YTM.

Excess return = YTM of bond - required return

Excess return = 8.94% - 10.1%

Excess return = -1.16%

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