Question

1) A 10-year corporate bond has a coupon rate of 6% with annual payments. If the current value of the bond in the marketplace is $900, then what is the Yield-to-Maturity (YTM)?

2) A 10-year corporate bond has a coupon rate of 6% with annual payments. If the current value of the bond in the marketplace is $1100, then what is the Yield-to-Maturity (YTM)?

3) A 10-year corporate bond has a coupon rate of 6% with semi-annual payments. If the current value of the bond in the marketplace is $900, then what is the Yield-to-Maturity (YTM)?

Answer 1

1)

Yield to maturity of a bond is the internal rate of return earned by investor.

Bond price is the initial year cash outflow.

Periodic cash flow = Face value x coupon rate = $1,000 x 0.06 = $ 60

Last period cash flow = Face value + coupon amount = $ 1,000 + $ 60 = $ 1,060

IRR can be computed using excel as:

	A	B
1	Year	Cash flow
2	0	$          (900)
3	1	$                  60
4	2	$                  60
5	3	$                  60
6	4	$                  60
7	5	$                  60
8	6	$                  60
9	7	$                  60
10	8	$                  60
11	9	$                  60
12	10	$             1,060
13	IRR	7.45%

If above table is excel sheet, use formula “=IRR(B2:B12) in cell B13 to get IRR as 14.96%

Yield -to-Maturity of the bond is 7.45 %

2)

Yield to maturity of a bond is the internal rate of return earned by investor.

Bond price is the initial year cash outflow.

Periodic cash flow = Face value x coupon rate = $1,000 x 0.06 = $ 60

Last period cash flow = Face value + coupon amount = $ 1,000 + $ 60 = $ 1,060

IRR can be computed using excel as:

	A	B
1	Year	Cash flow
2	0	$ (1,100)
3	1	$                  60
4	2	$                  60
5	3	$                  60
6	4	$                  60
7	5	$                  60
8	6	$                  60
9	7	$                  60
10	8	$                  60
11	9	$                  60
12	10	$             1,060
13	IRR	4.72%

If above table is excel sheet, use formula “=IRR(B2:B12) in cell B13 to get IRR as 4.72%

Yield -to-Maturity of the bond is 4.72 %

3)

Yield to maturity of a bond is the internal rate of return earned by investor.

Bond price is the initial year cash outflow.

Periodic cash flow = Face value x coupon rate = $1,000 x 0.06/2 = $ 1,000 x 0.03 = $ 30

Last period cash flow = Face value + coupon amount = $ 1,000 + $ 30 = $ 1,030

IRR can be computed using excel as:

	A	B
1	Period	Cashflow
2	0	$ (900)
3	1	$         30
4	2	$         30
5	3	$         30
6	4	$         30
7	5	$         30
8	6	$         30
9	7	$         30
10	8	$         30
11	9	$         30
12	10	$         30
13	11	$         30
14	12	$         30
15	13	$         30
16	14	$         30
17	15	$         30
18	16	$         30
19	17	$         30
20	18	$         30
21	19	$         30
22	20	$   1,030
23	IRR	3.72%

If above table is excel sheet use formula “=IRR(B2:B22) in cell B23 to get IRR as 3.72%

Yield -to-Maturity of the bond = 3.72 % x 2 = 7.44 %