Question

1. Please watch these videos on bonds, TeachMeFinance Bond Valuation (3:59) and Calculating YTM in EXCEL and TI w/ Bionic Turtle (8:57), and answer the following questions: A $1,000 par value bond, has an annual coupon rate of 6 percent, an annual yield to maturity of 7.5 percent, and 10 years until maturity. Assuming semi-annual coupon payments:

a. What is the bond’s coupon payment per period?

b. What is the bond’s price?

c. If the bond were selling for $929, what would the annual yield-to-maturity be?

d. What is the effective yield-to-maturity if you reinvest coupon payments at 9 percent?

Answer 1

a)
Coupon payment per period = Face value * semiannual coupon rate
= $1000 * 6% / 2
= $1000 * 3%
= $30

Coupon payment per period = $30

b)
Rate = 7.5% / 12 = 3.75%
Nper = 10 * 2 = 20
PMT = $30
FV = 1000

Bond's price can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(3.75%,20,-30,-1000)
= $895.78

Bond's price = $895.78

c)
Nper = 20
PMT = 30
PV = 929
FV = 1000

Annual yield to maturity calculated by using the following excel formula:
=RATE(nper,pmt,pv,fv)*2
=RATE(20,30,-929,1000)*2
= 7.00%

Annual yield to maturity = 7.00%

d)
Nper = 20
PV = 929
FV = 1941.14
PMT = 0

Effective yield to maturity can be calculated by using the following excel formula:
=RATE(nper,pmt,pv,fv)*2
=RATE(20,0,-929,1941.14)*2
= 7.50%

Effective yield to maturity = 7.50%