Question

- Nesmith Corporation's outstanding bonds have a $1,000 par value, an 8% semiannual coupon, 9 years to maturity, and a 10% YTM. What is the bond's price?

- A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,054.06, and currently sell at a price of $1,105.17. What are their nominal yield to maturity and their nominal yield to call?

Answer 1

1)

Semi annual rate = 10% / 2 = 5%

Semi annual coupon = (8% of 1000) / 2 = 40

Number of periods = 9 * 2 = 18

Bond's price = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Bond's price = 40 * [1 - 1 / (1 + 0.05)^18] / 0.05 + 1000 / (1 + 0.05)^18

Bond's price = 40 * [1 - 0.415521] / 0.05 + 415.520655

Bond's price = 40 * 11.689587 + 415.520655

Bond's price = $883.10

2)

a)

Yield to maturity:

Semi annual coupon = (8% of 1000) / 2 = 40

Number of periods = 10 * 2 = 20

Yield to maturity = 6.55%

Keys to use in a financial calculator:

2nd P/Y 2

FV 1000

PMT 40

N 20

PV -1105.17

CPT I/Y

b)

Yield to call:

Number of periods = 5 * 2 = 10

Yield to call = 6.44%

FV 1054.06

PV -1105.17

N 10

PMT 40

CPT I/Y