Question

Create a new table but this time with a 10% rate

Example II Given Change in Yield on Notes with different coupons, but same maturity same example but use a 10% coupon instead of a 5% coupon 6% yield 6% yield Coupon Rate 2% initial yield 5% Coupon Rate 5% Initial yield 5% 20 20 20 2 0 1020 19.05 18.14 17.28 16.45 799.20 18.87 17.80 16.79 15.84 762.20 50 50 50 50 1050 47.62 45.35 43.19 41.14 822.70 47.17 44.50 41.98 39.60 784.62 4 870.12 831.51 1000.00 sum Percentage change 957.88 4.21

Answer 1

Year	Coupon rate 10%	Initial yield 5%	6% yield
1	100	95.24	94.34
2	100	90.70	89.00
3	100	86.38	83.96
4	100	82.27	79.21
5	1100	861.88	821.98
Sum		1,216.47	1,168.49
Percentage change			-3.94%
(1,168.49 - 1,216.47) ÷ 1,216.47 × 100

Work:

Year	Cash flow	PVF @ 5%	Discounted cash flow
1	100	0.952380952	95.24
2	100	0.907029478	90.7
3	100	0.863837599	86.38
4	100	0.822702475	82.27
5	1100	0.783526166	861.88
Price of bond @ YTM 5%			1216.47

Year	Cash flow	PVF @ 6%	Discounted cash flow
1	100	0.943396226	94.34
2	100	0.88999644	89
3	100	0.839619283	83.96
4	100	0.792093663	79.21
5	1100	0.747258173	821.98
Price of bond @ YTM 6%			1168.49

• Price of a bond is the present value of all future cash flows from it discounted at a required rate of
  return. This required rate of return is the YTM.
• YTM is the yield the bond-holder earns provided he holds the bond till maturity.
• Cash flows from a bond are the periodic coupons and the maturity value on redemption.
• In this case, coupon = 1000 × 10% = 100 (Bond coupon rate is always applied on the par value of the bond)
• Cash flow in Year 5 = coupon + redemption value = 100 + 1000 = 1100