Question

please show how to calculate on a financial calulator

Question 5.Linville Corporation issued 15-year, par $1,000 bonds ten years ago at a coupon rate of 5 percent. The bonds make semi-annual payments. If these bonds currently sell for 90 percent of par value, what is its yield to maturity (YTM)? Question 6. Pecos Company has just issued a 10-year, 10 percent coupon rate, $1,000- par bond that pays interest semiannually. Three years later, if the going rate of interest on the bond falls to 8 percent, what is the value of the bond? Ouestion 7. Karen just bought a 10-year, 5% coupon bond with $1,000 par for $825, If she sells this bond four years later for $950, what is her realized yield in year 4 (with semi-annual interests)?

Answer 1

Solution to QUESTION-5

The Yield to maturity of (YTM) of the Bond

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 5.00% x ½]	PMT	25
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [(15 Years – 10 Years) x 2]	N	10
Bond Price [-$1,000 x 90%]	PV	-900

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the semi-annual yield to maturity (YTM) on the bond = 3.715%.

The semi-annual Yield to maturity = 3.715%.

Therefore, the annual Yield to Maturity of the Bond = 7.43% [3.715% x 2]

“Hence, the Yield to maturity of (YTM) of the Bond will be 7.43%”