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M/S. Marutham Investment Bond 2013 was issued in January 2014, with a maturity period of 2...

M/S. Marutham Investment Bond 2013 was issued in January 2014, with a maturity period of 2 years. With a Coupon payment of 7% per annum made every 6 months with a Face value of Rs.100. What is the YTM for the bond, if the prevailing market price was Rs. 84 as at January 2014?

Solutions

Expert Solution

Price of bond in Jan 2014 = $84, Coupon rate = 7% per annum, No of years to maturity = 2 years

As the bond pays coupon semi annually, therefore

Semi annual coupon payment = (Coupon rate Face value) / 2 = (7% x 100) / 2 = 7/2 = $3.5

No of half years to maturity = 2 x no of years to maturity = 2 x 2 = 4

To calculate YTM of bond, we will first calculate the semi annual YTM of the bond. Semi annual YTM of the bond can be found out using RATE function in excel

Formula to be used in excel: =RATE(nper,-pmt,pv,-fv)

Using RATE function in excel, we get Semi annual yield to maturity = 8.3706%

Yield to maturity = 2 x semi annual yield to maturity = 2 x 8.3706% = 16.7412% = 16.74% (rounded to two decimal places)

Hence YTM for bond = 16.74%

jeff jeffy answered 3 months ago
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