In: Finance
The market price is $1,200 for a 9 -year bond ($1,000 par value) that pays 8 percent annual interest, but makes interest payments on a semiannual basis (4 percent semiannually). What is the bond's yield to maturity?
Yield to maturity is the rate of return the investor will get if he/she hold the bold till maturity period
So YTM is like internal rate of return, if we discount all the cash inflow from the bond using YTM, the present value will be equal to the bond current price.
YTM is calculated using Excel, the function used is (IRR)
Pls refer below table
Year |
Cash flow |
Amount |
0 |
Bod price (Outflow) |
-1200 |
1 |
Coupon (Inflow) |
40 |
2 |
Coupon (Inflow) |
40 |
3 |
Coupon (Inflow) |
40 |
4 |
Coupon (Inflow) |
40 |
5 |
Coupon (Inflow) |
40 |
6 |
Coupon (Inflow) |
40 |
7 |
Coupon (Inflow) |
40 |
8 |
Coupon (Inflow) |
40 |
9 |
Coupon (Inflow) |
40 |
10 |
Par + Coupon (Inflow |
40 |
11 |
Coupon (Inflow) |
40 |
12 |
Coupon (Inflow) |
40 |
13 |
Coupon (Inflow) |
40 |
14 |
Coupon (Inflow) |
40 |
15 |
Coupon (Inflow) |
40 |
16 |
Par + Coupon (Inflow |
40 |
17 |
Coupon (Inflow) |
40 |
18 |
Par + Coupon (Inflow |
1040 |
YTM |
2.60% |
|
Formula |
=IRR(G44:G64) |
Semiannual YTM = 2.6
Annual; YTM = 2.6*2 = 5.2%
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