Question

How would you plug this in the BA II Plus to solve?

A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?

5.03 percent

4.68 percent

4.92 percent

4.84 percent

5.68 percent

Answer 1

The yield to maturity is computed as shown below:

Simply plug the below figures in the financial calculator:

PV = - 989.40

FV = 1,000

PMT will be as follows:

= 7% / 2 x 1,000 (Since the payments are semi annual, hence divided by 2)

= 35

N will be as follows:

= 10 x 2 (Since the payments are semi annual, hence multiplied by 2)

= 20

Now press CPT and then press I/Y. It will give I/Y equal to

= 3.575090392%

Now to get it on annual basis, we need to multiply it by 2

= 3.575090392 x 2

= 7.150180784% or 0.0715080874

Now to get it on real terms we shall use the below equation

= [ (1 + 0.0715080874) / (1 + inflation rate) ] - 1

= [ 1.0715080874 / 1.022 ] - 1

= 4.84% Approximately

Feel free to ask in case of any query relating to this question