Question

$4 million Bank loan due in 15 years at 8% pa with quarterly compounding; and 8,000 semi-annual Bonds with 9.36% quoted coupon rate and 10 years to maturity. The face value of these bonds is $1,000 and current trading price is $1,250.

i. EAR of Bond is (1+0.0299)2 – 1 = 6.06% (20 n, -1250 PV, 46.80 PMT, 1000 FV => CPT I/Y)

can you give me how to use the financial calculator to get current return?? i need a detailed steps.

Answer 1

annual coupon rate , c = 9.36% = 0.0936

par value of bond , M = $1000

annual coupon value , a= c*M =0.0936*1000 = 93.6

semi-annual coupon value = a/2 = 93.6/2 = $46.8

current price of bond , p = $1250

maturity of bond , m = 10 years

no. of semi-annual periods , n = 2*m = 2*10 = 20

, now to find the current return , you need to solve for I/Y in the financial calculator

use the following keys :

press N , after that you have to enter the maturity of the bond = 20 , since it is a semi-annual bond

then press PV , after that you need to enter the price of the bond with a minus sign = -1250

then press PMT , after that you have to enter the semi-annual coupon value = 46.8

then press FV , after that you have to enter the maturity value of bond = 1000

then press CPT I/Y , and you will get your answer as the current return

then press