Question

In: Economics

1. What is the yield to maturity on the following bonds; all have a maturity of...

1.

What is the yield to maturity on the following bonds; all have a maturity of 10 years, a face value of 2000, and a coupon rate of 4 percent (paid semiannually). The bond's current prices are:

a. $1,180

b. $ 2,400

c. Explain the relationship between yield to maturity and bond prices.

Solutions

Expert Solution

Yield to maturity:-

we solve the following by approximately formula

YTM =[ C + (M-P/n ) ÷ ( 0.4M + 0.6P) ]

C = coupon amount

M = face value

P = market price

n = number of years

(A) YTM :-

YTM = 80 +( 2000-1180/10) / 0.4(2000) + 0.6(1180)

= 80 + 82 / 800+708

= 162 / 1508

= 0.1074

= 10.74%

(B) YTM:-

80 + 2000-2400/10 / 0.4(2000) + 2400(0.6)

= 80 + (-40) / 800+1440

= 40 / 2240

= 0.03571

= 3.57%

(C) relationship between yield to maturity and bond prices:-

There is an inverse relationship between price of the bond and its yield to maturity. The higher the Bond price, the lower the YTM and the lower the Bond price the higher the YTM of bonds.

The main cause that affect bond price is market rating of the issuing company, interest rate and inflationary expectations. People are prefer bond holding to shares to protect their capital in times of inflation . Bond price manage interest rate risk to secure the capital of the investor in a better manner


Related Solutions

Assuming that all bonds have a face value of $1,000 and a yield to maturity of...
Assuming that all bonds have a face value of $1,000 and a yield to maturity of 8%, which of the following bonds will have the highest degree of price interest rate risk? A bond with 8% coupon rate that matures in 15 years. A bond with 6% coupon rate that matures in 15 years. A bond with 8% coupon rate that matures in 30 years. A bond with 6% coupon rate that matures in 30 years.
Yield to maturity. What is the yield of each of the following​bonds,​, if interest​ (coupon)...
Yield to maturity. What is the yield of each of the following bonds,, if interest (coupon) is paid semiannually?a. What is the yield of the following bond if interest (coupon) is paid semiannually?(Round to two decimal places.)Par ValueCoupon RateYears to MaturityYield to MaturityPrice$5,000.0011%30?$6,030.00$5,000.008%5?$5,000.00$1,000.0012%5?$1,200.00$1,000.006%20?$590.00
Yield to maturity. What is the yield of each of the following​ bonds​, if interest​ (coupon)...
Yield to maturity. What is the yield of each of the following​ bonds​, if interest​ (coupon) is paid annual​ly? a. What is the yield of the following bond if interest​ (coupon) is paid annual​ly? ​(Round to two decimal​ places.) Data Table Par Value Coupon Rate Years to Maturity Yield to Maturity Price ​$1,000.00 10​% 30 ​? ​$900.00 ​$5,000.00 6​% 10 ​? ​$5,300.00 ​$5,000.00 8​% 10 ​? ​$5,730.00 ​$1,000.00 7​% 5 ​? ​$800.00
Yield to maturity. What is the yield of each of the following bonds if interest​ (coupon)...
Yield to maturity. What is the yield of each of the following bonds if interest​ (coupon) is paid semiannual​ly? (Round to two decimal​ places.) Par Value Coupon Rate Years to Maturity Yield to Maturity Price ​$1,000.00 12​% 15 ​?______ ​$1,000.00 ​$5,000.00 11​% 10 ​?______ ​$6,010.00 ​$5,000.00 8​% 25 ​?______ ​$7,120.00 ​$1,000.00 7​% 30 ​?______ ​$700.00
11-What is the approximate yield to maturity for the following bonds? Assume these are bonds issued...
11-What is the approximate yield to maturity for the following bonds? Assume these are bonds issued in the United States. a.5 years to maturity, 6 percent coupon rate, current price is $950. b.10 years to maturity, 0 percent coupon rate, current price is $339. c.15 years to maturity, 8.5 percent coupon rate, current price is $1030.
The yield to maturity on 1-year zero-coupon bonds is currently 6.5%; the yield to maturity on...
The yield to maturity on 1-year zero-coupon bonds is currently 6.5%; the yield to maturity on 2-year zeros is 7.5%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon of 8.5%. The face value of the bond is $1,000. At what price will the bond sell? What will the yield to maturity on the bond be? If the expectations theory of the yield curve is correct, what is the market expectation...
Why do callable bonds typically have a higher yield to maturity than noncallable bonds, holding all...
Why do callable bonds typically have a higher yield to maturity than noncallable bonds, holding all other things constant? Is the yield differential between callable and noncallable bonds likely to be constant over time? Why? Because the dividend payments on preferred stock are not a tax-deductible expense, the explicit cost of this form of financing is high. What are some of the offsetting advantages to the issuing firm and to the investor that enable this type of security to be...
Yield to maturity A firm's bonds have a maturity of 8 years with a $1,000 face...
Yield to maturity A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 4 years at $1,050, and currently sell at a price of $1,096.35. What is their nominal yield to maturity? Round your answer to two decimal places. % What is their nominal yield to call? Round your answer to two decimal places. % What return should investors expect to earn on these bonds? Investors would expect...
YIELD TO MATURITY A firm's bonds have a maturity of 8 years with a $1,000 face...
YIELD TO MATURITY A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 4 years at $1,152, and currently sell at a price of $1,278.74. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. % What return should...
YIELD TO MATURITY A firm's bonds have a maturity of 10 years with a $1,000 face...
YIELD TO MATURITY A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 8% semiannual coupon, are callable in 5 years at $1,052, and currently sell at a price of $1,099.77. What is their nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. % What is their nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places. %
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT