Question

A bond has a $1,000 par value, 20 years to maturity, and a 5% annual coupon and sells for $860. What is its yield to maturity (YTM)? Round your answer to two decimal places. % 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)-Yield to maturity of (YTM) of the Bond

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 5.00%]	PMT	50
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [20 Years]	N	20
Bond Price [-$860]	PV	-860

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 of the Bond (I/Y) = 6.24%.

“Hence, the Yield to maturity of (YTM) of the Bond will be 6.24%”

(b)-Price of the Bond 2 years from today

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 5.00%]	PMT	50
Market Interest Rate or Yield to maturity on the Bond [6.24%]	1/Y	6.24
Maturity Period/Time to Maturity [20 Years – 2 Years]	N	18
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $868.12.

“Hence, the current market price of the bonds will be $868.12”