Question

A $269300 bond with coupon rate of 5% is offered for sale for 3366 25 The bond pays interest semiannually and matures in 5years. Compounding Semi annual Find the Following Sermi annaul payments Asemi Current yeild Yeild to Haturity (show trail andl error and inter p olastion)

Answer 1

Bond value	269300
Coupon Rate	5%
Market Price	336625
Maturity Period(Years)	5
Interest Paid Semi-annually
Compounded semi-annually
Any Interest rate pa compounded m times a year is known as nominal Interest rate and it should be immediately divided by m.Hence in the given sum,we can divide 5% by 2
Hence 6 month interest rate	2.5%
Number of period	5 x 2

a) Semi Annual payment = $ 269,300 x 2.5% = $6732.5

b) Current Yield = Annual Interest /Current Market Price x 100

Hence Current Yield = 13465 (this is the full year interest 6732.5 x 2) x 100
336625

Current Yield = 4%

(c)For Once shot redemption, we can use the following formula:

YTM = C + ( F - P)/n
  (F + P)/2
(6732.5 + ((336625-269300)/5))/((269300+336625)/2)

=6.7%

Since all the components are given , we don't have to use trial and error method to arrive at YTM.

If you want to understand trial and error, do comment, will happily explain it to you . Don't forget to thumbs up :)