Question

Instructions: You are required to use a financial calculator or spreadsheet (Excel) to solve the problems (provided on page 4) related to risk and return characteristics and stock/bond valuation. You are required to show the following three steps for each problem (sample problems and solutions are provided for guidance):

(i) Describe and interpret the assumptions related to the problem.

(ii) Apply the appropriate mathematical model to solve the problem.

(iii) Calculate the correct solution to the problem.

A company’s non-callable bonds currently sell for $1,165. They have a 15-year maturity, a coupon rate of 8% with semiannual payments, and a par value of $1,000. What is their yield to maturity (round your answer to two decimal places)?

Answer 1

Calculation of yield to maturity (YTM) :

Coupon rate (semi annual) = 8% /2 = 4%

Coupon interest (semi annual) = $1000 * 4% = $40

Par value (P) = $1000

Market price (M) = $1165

Years (n) - semi annually = 15 * 2 = 30

Now, YTM formula

YTM = (Copoun + ((P - M)/n)) / ((P + M) / 2)

YTM = ($40 + (($1000 - $1165)/30)) / (($1000 + $1165) / 2)

YTM = ($40 - $5.5) / $1082.50

YTM = $34.50 / $1082.50

YTM (semi annually) = 0.0319 or 3.19%

Converting the semi annual YTM into annual YTM

YTM (annually) = 3.19% * 2

YTM (annually) = 6.38%