Question

1. What is the yield to maturity for a bond that has a coupon rate of 5.2% payable semi-annually, a price tag of $850 and it will mature in 8 years?
2. What should a person pay for a bond that matures in 16 years, has a yield to maturity of 12.6%, and has a coupon rate of 7.5% payable semi-annually?

Answer 1

1)

Assuming face value to be $1,000

Number of period = 8 * 2 = 16

Coupon = (0.052 * 1000) / 2 = 26

Yield to maturity = 7.75%

Keys to use in a financial calculator: 2nd I/Y 2, FV 1000, PV -850, PMT 26, N 16, CPT I/Y

2)

Assuming face value to be $1,000

Number of period = 16 * 2 = 32

Coupon = (0.075 * 1000) / 2 = 37.5

Rate = 12.6% / 2 = 6.3%

Current price = Coupon * [1 - 1 / (1 + r)ⁿ] / r + FV / (1 + r)ⁿ

Current price = 37.5 * [1 - 1 / (1 + 0.063)³²] / 0.063 + 1000 / (1 + 0.063)³²

Current price = 37.5 * 13.62606 + 141.55836

Current price = $652.54