Question

A firm has a 10% per annum upon bond and sh 1000 face value .The interest is paid semi -annually and the bond has 20 years to maturity.If investors require 12% per annum yield what is the value of the bond? what will be the yield to maturity if the bond was quarterly?

Answer 1

Answer : Calculaton of Value of Bond :

Value of Bond ca be calculted using PV function of Excel :

Calculation of Value of Bond when required rate of return is 12%

=PV(rate,nper,pmt,fv)

where rate is required rate of return that investor expect i.e 12%/2 = 6% (As interest compounded semiannually)

nper is the years to maturity i.e 20 * 2 = 40 (Multiplied by 2 As interest compounded semiannually)

pmt is coupon payment i.e 1000 * 10% = 100/2 = 5 (Divided by 2 As interest compounded semiannually)

fv is the face value i.e 1000

=PV(6%,40,-50,-1000)

Price of Bond is $849.54

Calculation of Yield to maturity :

Yield to maturity can be calcuted using Rate function of excel

=RATE(nper,pmt,pv,fv)

nper is the years to maturity i.e 20 * 4 = 80 (Multiplied by 4 As interest compounded quartely)

pmt is coupon payment i.e 1000 * 10% = 100/4 = 25 (Divided by 4 As interest compounded quarterly)

pv (calcuted above by asuuming that current value calcuted above is the current bond price as no information is given) i.e 849.54

fv is the face value i.e 1000

=RATE(80,25,-849.54,1000)

Quarterly yield to maturity is 3% and annual (3% * 4) is 12%