Question

You own a bond that pays 64 in interest semiannually. FV = 1000. current market price is 1021.6 the bond matures in 11 years. what is the yield to maturity?

Answer 1

Face value : Rs 1000

Current Market price :Rs. 1021.60

Bond matures : 11 years

Interest semi annually: Rs. 64

No.of periods : 11*2 = 22

Interest rate per period : i/2

i = yield to maturity

Formula:

CMP= interest/1+i/2 +interest/(1+i/2)^2+••••••••+interest+face value/(1+i/2)22

= 1021.6=64/1+i/2 + 64/(1+i/2)^2+•••••••+64+1000/(1+i/2)^22

Using Excel :

=Rate(nper,pmt,pv,[fv],[type],[guess])*2

nper : total no. Of payment

Pmt: size of payment each period

Pv : minus the CMP

FV : bond face value

Type : 0 or blank for payment at end of each payment; 1 for beginning of periods

guess: optional.use a number between 0 and 1 if convergence problems

Multiply results by 2 to put yield to maturity on annual basis.

=Rate(22,64,-1021.60,1000)*2

Yield to maturity =12.44%