Question

1. Your broker offers to sell you for $901.19 a 30-year, $1,000 face value Treasury bond with a 10% coupon rate. The bond pays interest annually. What is the yield to maturity, or expected rate of return, if you pay the asking price?

   		9%
   		10.19%
   		11.89%
   		11.15%
   		13.12%.

1 points   

QUESTION 15

1. What is the most that you would be willing to pay for the above bond if you require a rate of return of 12%?

   		$1,200
   		$1,100
   		$900.09
   		$838.90
   		$799.99.

Answer 1

Yield to Maturity 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 10.00%]	PMT	100
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [30 Years]	N	30
Bond Price [-$901.19]	PV	-901.19

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 annual yield to maturity (YTM) on the bond = 11.15%.

“Hence, the Yield to maturity of (YTM) of the Bond will be 11.15%”

Price of the Bond

• 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 10.00%]	PMT	100
Market Interest Rate or Yield to maturity on the Bond [12.00%]	1/Y	12
Maturity Period/Time to Maturity [30 Years]	N	30
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) = $838.90.

“Hence, the price that would be willing to pay for the bond will be $838.90”