Question

Ms. Gayatri purchased a bond at a price of Rs. 104,800 that pays a coupon of 8% and a face value of Rs 100,000. This bond matures in 5-years from now. After investing in the bond yesterday She heard about another opportunity that pays a higher coupon of 9% at a price of Rs. 108,918.50 and a maturity of 5 years. She is anxious to know whether she made a mistake buying the 8% bond.

Answer 1

We will calculate the YTM of both the boths to understand if she made a mistake buying the 8% coupon bond. The YTM is the yield a person gets if he holds the bond till maturity. Using the BA 2 Plus financial calculator, we will find the YTM. Please make the following strokes on your calculator-

BOND 1

2ND FV

-104,800 PV

100,000 FV

8000 PMT

5 N

CPT I/Y

I/Y = 6.8345%

Similarly, for Bond 2, YTM = 6.8345%

Even thought both bonds have different coupons, they have the same YTM and hence Ms. Gayatri did not make any mistake by purchsing the 8% coupon bond.

Do let me know in the comment section in case of any doubt.