Question

The Pioneer Petroleum Corporation has a bond outstanding with an $60 annual interest payment, a market price of $880, and a maturity date in eight years. Assume the par value of the bond is $1,000.

Find the following: (Use the approximation formula to compute the approximate yield to maturity and use a calculator or Excel to compute the exact yield to maturity. Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

	a. Coupon rate 6.00 % b. Current yield 6.82 % c-1. Approximate yield to maturity % c-2. Exact yield to maturity %

Answer 1

c-1.Hence approx YTM 7.98%

c2) This can be solved in the following 2 ways in excel

First Way

Thus YTM is 8.10%

Second Way

Exact YTM is given in cell B4. To calculate this I have used excel solver function. Initially put any value in YTM column (let say 5%). On basis of this we calculate Sum of PV of ( Coupon +Principal). This number must be 880 that is equal market price. So we need to change YTM from 5% to that value at which Sum of PV of ( Coupon +Principal) is 880.

One can use excel solver to do this. Here we need to set Sum of PV of ( Coupon +Principal) to value of 880 by changing YTM values. The answer will be 8.01%