Question

A 6% coupon bond Which face value $1000, Maturity of five years and paying semi-annual coupon payment sales of $1050

A) What is yield to maturity.
b) what would happen if yield to maturity if it’s price suddenly falls to $900.

Answer 1

The yield to maturity can be found using RATE function in EXCEL

=RATE(nper,pmt,pv,fv,type)

Here the payments are semi-annual

nper=2*5=10 (Total 5 years)

pmt=semi-annual payment=(6%*1000)/2=30

pv=1050

fv=1000

=RATE(10,30,-1050,1000,0)

RATE=2.43%

Semi-annual yield to maturity=2.43%

Annual yield to maturity=2*2.43%=4.86%

2. If price falls to 900, then

=RATE(10,30,-900,1000,0)

RATE=4.25%

Semi-annual yield to maturity=4.25%

Annual yield to maturity=2*4.25%=8.50%