Question

1. A 4% coupon bond with 6 months remaining until maturity is currently trading at $997.78. Assume semi-annual coupon payments. The bond's YTM is__________%. Do not round any intermediate work. Round your *final* answer to 2 decimal places (example: .1234567 = 12.35). Do not enter the % sign.

2. A bond with 9 years left to maturity is trading for $1010. It pays coupons semiannually. Its YTM is currently 3.6%. The coupon rate for this bond must be ________%.

Do not round any intermediate work. Round your *final* answer to 2 decimal places (example: .1234567 = 12.35). Do not enter the % sign.

3.A bond is currently trading at a price of $1089. Its "current yield" (not YTM) is 5.5%. The coupon rate on this bond must be _______%.  

Do not round any intermediate work. Round your *final* answer to 2 decimal places (example: .1234567 = 12.35). Do not enter the % sign.

Answer 1

1.) Using the Financial calculator,

N = 1 (Since only one coupon payment is remaining)

PV = -997.78 (Given)

PMT = 20 (4% of Face Value is 40, so semi-annual coupon is 20)

FV = 1000 (Face Value)

and Compute I/Y = 2.2269%

This is the rate per period. Therefore, YTM = 2.2269% x 2 = 4.4539%

2.) N = 18 (Since 9 years are left to maturity and coupon payments are semi-annual)

I/Y = 1.8% ( YTM/2, as coupon payments are semi-annual)

PV = -1010 (Given)

FV = 1000 (Face Value)

and Compute PMT = 18.6553

This is the semi-annual coupon. Therefore, annual coupon = 18.6553 x 2 = 37.3101, which is 3.73%

3.) Current Yield = Annual Coupon Payment / Current Bond Price

0.055 = Annual Coupon Payment / 1089

Annual Coupon Payment = 1089 x 0.055 = 59.8950 which is 5.9895%