Question

A zero-coupon bond with $1000 face value has 10-year to maturity. If this bond is currently trading at $463.20. What is this bond’s YTM (i.e., required rate of return)?

What is the coupon rate for a bond with three years until maturity, a price of $953.46, and a yield to maturity of 6%? Assume the bond’s face value is $1,000.

Kodak has a bond with 10 year until maturity, a coupon rate of 10%, and selling for $1,200. This bond pays coupon payment annually. What is the yield to maturity of this bond?

Answer 1

We need to use financial calculator for YTM and coupon rate with below key strokes:

YTM of zero-coupon bond

N= no. of years = 10; PMT= annual interest = $0; PV= present value = -$463.20; FV= future value =$1,000 > CPT=compute > I/Y= YTM = 7.99%

So, Yield to maturity of the zero-coupon bond is 7.99 or 8%.

Note: PV needs to be entered as negative value otherwise financial calculator will show error.

coupon rate for a bond

N= no. of years = 3; I/Y= YTM = 6%; PV= present value = -$956.46; FV= future value =$1,000 > CPT=compute > PMT = coupon interest = $43.7

Coupon rate = coupon interest/face value = $43.7/$1,000 = 4.37%

So, Coupon rate is 4.37%.

Yield to maturity of the bond

coupon payment = face value*coupon rate = $1,000*10% = $100

N= no. of years = 10; PMT= coupon payment = $100; PV= present value = -$1200; FV= future value =$1,000 > CPT=compute > I/Y= YTM = 7.13%

So, Yield to maturity of the bond is 7.13%.