Question

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,065. The bond's...

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,065. The bond's annual E(r) must be

  • 13.49 percent.

  • 5.80 percent.

  • 7.00 percent.

  • 5.96 percent.

  • 1.69 percent.

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Homework Answers

Answer #1

YTM is calculated using RATE function in Excel :

nper = 8 (years remaining until maturity with 1 annual coupon payment each year)

pmt = 1000 * 7% (annual coupon payment = face value * coupon rate)

pv = -1065 (Current price of bond. This is entered with a negative sign because it is a cash outflow to buy the bond today).

fv = 1000 (face value of bond receivable at maturity).

RATE is calculated to be 5.96%. This is the YTM.

The bond's annual E(r) must be 5.96%

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