Question

7a. A bond with a face value of $1000 makes quarterly payments of $20. The bond is currently selling for $1048.12 and has 10 years remaining until maturity. What is the bond's official yield-to-maturity? Write your answer out to four decimals - for example, write 6.18% as .0618.

7b. You manage a pension fund that promises to pay out $10 million to its contributors in five years. You buy $7472582 worth of par-value bonds that make annual coupon payments of 6% and mature in five years. Right after you make the purchase, the interest rate on same-risk bonds decreases to 5.8%. If the rate does not change again and you reinvest the coupon payments that you receive in same-risk bonds, how much will you fall short of the money that you promised? Write your answer as a positive number and round it to the nearest dollar.

Answer 1

Solution:

Solving question first as HOMEWORKLIB's guidelines:

1.Calculation of Yield to matury(YTM)

YTM=[Annual coupon+(face value-Sale Price)/Years to maturity]/(face value+Sale Price)/2

=$80+($1000-$1048.12)/10/($1000+$1048.12)/2

=$75.188/$1024.06

=0.0734