Question

Database Software Inc. (DSI) and US Data Inc. (USD) are in the same risk class. Both...

Database Software Inc. (DSI) and US Data Inc. (USD) are in the same risk class. Both companies have bonds outstanding that have 8 years to maturity and a coupon rate of 8%. The only difference in these bonds is that DSI bond has a quarterly coupon, while USD bond has an annual coupon payment. The market price of the DSI bond is $890.75.

What is the yield to maturity (YTM) of the DSI bond?

A.

11.04%
B.

13.20%
C.

10.00%
D.

7.44%
E.

9.95%
F.

10.14%
G.

12.34%
H.

8.48%
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Homework Answers

Answer #1

Answer is C. 10.00%.

We can use financial calculator for calculation of YTM with below key strokes:

N = no. of quarters = 8*4 = 32; PV = market price of bond = -890.75; PMT = quarterly coupon = $1,000*8%/4 = 20; FV = par value = 1,000 > CPT = compute > I/Y = quarterly YTM = 2.5%

Annual YTM = 2.5%*no. of quarters in a year = 2.5%*4 = 10.00%

PV will be entered as negative value because it's a cash outflow. this is the amount you need to pay to purchase the bond.

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