Question

Question 1: what is the yield to maturity of a corporate bond with 20 years to maturity, a coupon rate of 6% per year, a $1000 par value and current market price of $1100? assume semiannual coupon payments?

Answer 4.27%; 4.76%; 5.01%; 5.19%; 5.35%

Answer 1

Coupon rate(semi-annual) = 6%/2 = 3%

Coupon = 1000*3% = 30

Number of periods = 20*2 = 40

semi annual yield = r

1100 = 30/(1+r)+30/(1+r)^2+.....+30/(1+r)^39+30/(1+r)^40+1000/(1+r)^40 [market price of bond is sum of all the cash flows]

by trial and error method we can see value of r = 2.595%

So, YTM = 2.595*2 = 5.19% (Ans)

With r = 2.595%

	Period	Cashflow	Discounted cashflow
	1	30	29.24119109
	2	30	28.50157521
	3	30	27.78066691
	4	30	27.07799299
	5	30	26.39309225
	6	30	25.72551513
	7	30	25.07482346
	8	30	24.44059015
	9	30	23.82239889
	10	30	23.21984394
	11	30	22.6325298
	12	30	22.06007095
	13	30	21.50209168
	14	30	20.95822572
	15	30	20.42811611
	16	30	19.91141489
	17	30	19.40778292
	18	30	18.91688964
	19	30	18.43841282
	20	30	17.97203843
	21	30	17.51746033
	22	30	17.07438017
	23	30	16.64250711
	24	30	16.22155768
	25	30	15.8112556
	26	30	15.41133155
	27	30	15.02152302
	28	30	14.64157418
	29	30	14.27123561
	30	30	13.91026425
	31	30	13.55842317
	32	30	13.21548143
	33	30	12.88121393
	34	30	12.55540126
	35	30	12.23782959
	36	30	11.92829045
	37	30	11.62658068
	38	30	11.33250225
	39	30	11.04586213
	40	1030	369.6488779
Total			1100.058815