Question

You find the following Treasury bond quotes. To calculate the number of years until maturity, assume that it is currently May 2016. The bonds have a par value of $1,000. Rate Maturity Mo/Yr Bid Asked Chg Ask Yld ?? May 20 103.4729 103.5457 +.3132 6.179 5.674 May 25 104.5069 104.6526 +.4401 ?? 6.208 May 35 ?? ?? +.5522 4.211 In the above table, find the Treasury bond that matures in May 2025. What is your yield to maturity if you buy this bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Yield to maturity %

Answer 1

Yield to maturity (YTM) of the Bond

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 5.674% x ½]	PMT	28.37
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [(May 2016 to May 2025) x 2]	N	18
Bond Price/Current Market Price of the Bond [-$1,000 x 104.6526%]	PV	-1,046.526

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity on the bond (1/Y) = 2.515%

The semi-annual Yield to maturity = 2.515%

Therefore, the annual Yield to Maturity of the Bond = 5.03% [2.515% x 2]

“Hence, the Yield to maturity of (YTM) of the Bond will be 5.03%”