Question

A bond has a $1,000 par value, 12 years to maturity, and a 9% annual coupon and sells for $1,110.

1. What is its yield to maturity (YTM)? Round your answer to two decimal places.
   
       %
   
2. Assume that the yield to maturity remains constant for the next 2 years. What will the price be 2 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.
   
   $   

Answer 1

a.Information provided:

Par value= future value= $1,000

Current price= present value= $1,110

Time= 12 years

Coupon rate= 9%

Coupon payment= 0.09*1,000= $90

The yield to maturity is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -1,110

N= 12

PMT= 90

Press the CPT key and I/Y to compute the  yield to maturity.

The value obtained is 7.5725.

Therefore, the yield to maturity is 7.57%.

b.Information provided:

Par value= future value= $1,000

Time= 12 years - 2 years = 10 years

Yield to maturity= 7.5725%  

Coupon rate= 9%

Coupon payment= 0.09*1,000= $90

                                                                                                     

The price of the bond is computed by calculating the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 10

I/Y= 7.5725

PMT= 90

Press CPT key and PV to calculate the present value.

The value obtained is 1,097.66.

Therefore, the price of the bond 2 years from today is $1,097.66.