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

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%

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

Rahul Sunny answered 3 months ago

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