Question

1 (a) Yaw Appiah purchased a debt instrument that promises to pay GHS120 for a period of 20 years. If the instrument was acquired at GHS975, what is the yield to maturity?

1 (b) Determine the yield to maturity of a three-month certificate of deposit that currently sells at GHS940 and has a face value of GHS1,000.

1 (c) Calculate the duration of a GHS1,000 ten-year coupon bond when the interest rate is 10% interpret the results

Answer 1

In these type of questions, it is always advised to create a table like I did (attached below).

1) YTM 10.7%

2) YTM 8.4%

3) Duration - 4.241 (assumed coupon GHS100 every year)

Step by step approach mentioned below:

	FV assumed 1000
Period	Coupons	PV
0				YTD
1	120	108		10.70000%
2	120	98
3	120	88
4	120	80
5	120	72
6	120	65
7	120	59
8	120	53
9	120	48
10	120	43
11	120	39
12	120	35
13	120	32
14	120	29
15	120	26
16	120	24
17	120	21
18	120	19
19	120	17
20	120	16
	NPV	975

	FV assumed 1000
Period	Coupons	PV
0				YTM
1		0		2.10000%
2		0		8.40000%
3	1000	940
	NPV	940

	FV assumed 1000
Period	Coupons	PV	PV2
0
1	100	91	91	10%
2	100	83	165
3	100	75	225	Duration
4	100	68	273	4.241
5	100	62	310
6	100	56	339
7	100	51	359
8	100	47	373
9	100	42	382
10	1100	424	4241
	NPV	1000