Question

bond has a $1,000 par value, 10 years to maturity, and a 8% annual coupon and sells for $980.

What is its yield to maturity (YTM)? Round your answer to two decimal places.

b)Assume that the yield to maturity remains constant for the next 3 years. What will the price be 3 years from today? Do not round intermediate calculations. Round your answer to the nearest cent

2)Nesmith Corporation's outstanding bonds have a $1,000 par value, a 8% semiannual coupon, 6 years to maturity, and an 7% YTM. What is the bond's price? Round your answer to the nearest cent

Answer 1

a)

Coupon payment = 0.08 * 1,000 = 80

Number of periods = 10

Face value = 1,000

Price = 980

Yield to maturity using a financial calculator = 8.30%

Keys to use in a financial calculator: PV = -980, FV = 1000, N = 10, PMT = 80, CPT I/Y

b)

Number of periods = 7

Bond price = 80 * [ 1 - 1 / ( 1 + 0.083)⁷]] / 0.083 + 1000 / ( 1 + 0.083)⁷

Bond price = 80 * 5.153376 + 572.2698

Bond price = $984.5

You can also find this using a financial calculator: PMT = 80, I/Y = 8.3, N = 7, FV = 1000, CPT PV

2)

Coupon payment = 0.08 * 1000 = 80 / 2 = 40 ( since it is a semi annual bond, we divide by 2)

Number of periods = 6 * 2 = 12

YTM = 0.07 / 2 = 0.035

Face value = 1,000

Bond price = 40 * [ 1 - 1 / ( 1 + 0.035)¹²]] / 0.035 + 1000 / ( 1 + 0.035)¹²

Bond price = 40 * 9.663334 + 661.7833

Bond price = $1,048.3

You can also find this using a financial calculator: 2nd I/Y 2, FV = 1000, PMT = 40, N = 12, I/Y = 7, CPT PV