Question

1. A bond was purchased on April 15, 2008 and the quoted bond price was $930. The previous coupon date was January 1, 2008. The next coupon date is January 1, 2009. The bond will mature on January 1, 2015. The bond’s annual coupon rate is 7% and the face value of the bond is $1,000. Coupons will be paid annually.
   1. Compute the bond’s yield to maturity on an accrued interest payment basis.

Answer 1

Par/Face value	1000
Annual Coupon rate	0.07
Annual coupon	70
Present Value = Future value/ ((1+r)^t)
where r is the interest rate and t is the time period in years.
price of the bond = sum of present values of future cash flows
price of the bond = 930
Use excel to find r
r	0.08355
	01-01-2009	01-01-2010	01-01-2011	01-01-2012	01-01-2013	01-01-2014	01-01-2015
Year	1	2	3	4	5	6	7
Future cash flow	70	70	70	70	70	70	1070
present value	64.602464	59.62112	55.023875	50.781113	46.8655	43.251811	610.15628
price/sum of present values	930
The bond's yield to maturity is 8.355%.