Question

A bond with a 6% coupon rates makes annual coupon payments and has 4 years until maturity. The appropriate spot-rate curve is:

Year Spot Rate

1 6%

2 5.90%

3 5.10%

4 4.80%

1. A) What is the price per 100 par?
2. B) What is the bond’s yield to maturity?

Answer 1

a) price of the bond is 104.0528

use calculator and draw a time line

for PV ofn coupan payment in year 1 , 6/1.06= 5.6604

for PV ofn coupan payment in year 2, 6/(1.059)^2=5.3501

for PV ofn coupan payment in year 3, 6/(1.0510)^3= 5.1682

for PV ofn coupan payment in year 4, 106/(1.048)^4=87.8741

add all of them you will get  104.0528

b) irr= 7.8255%

use calculator CF0=-   104.0528

CF1=5.6604

CF2=5.3501

CF3=5.1682

CF4=87.8741

Compute IRR