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Question 4 - Yield to Maturity [2 points]: A firm’s bonds make an annual coupon interest payment of 7.35%. The bonds have a par value of $1,000, a current price of $1,130, and mature in 12 years. What is the yield to maturity on these bonds?

Question 5 – Zero Coupon Bond [2 points]: Consider a zero-coupon bond with a $1000 face value and ten years left until maturity. If the YTM of this bond is 10.4%, what is the price of this bond?

Question 6 - Coupon Rate [2 points]: What is the coupon rate of a two-year, $1,000 bond with semiannual coupons and a price of $954.35, if it has a yield to maturity of 6.8%?

Answer 1

4. The YTM is computed as follows:

Plug the below variables in the financial calculator as follows:

FV = 1,000

PV = - 1,130

PMT = 73.5 (7.35% x 1,000)

N = 12

Finally press CPT and then I/Y. It will give I/Y equal to 5.82% Approximately

5. The price is computed as follows:

Plug the below variables in the financial calculator as follows:

FV = 1,000

I/Y = 10.4

PMT = 0 (Since the zero coupon bond does not pays coupons)

N = 10

Finally press CPT and then PV. It will give PV equal to 371.80 Approximately

6. The rate is computed as follows:

Plug the below variables in the financial calculator as follows:

FV = 1,000

I/Y = 3.4 (6.8 / 2)

N = 4 (2 x 2)

PV = - 954.35

Finally press CPT and then PMT. It will give PMT equal to 21.60122572. Now the rate will be as follows:

= (PMT / Par value) x 2 (Multiplied by 2 since the payments are on semi annual basis)

= ($ 21.60122572 / $ 1,000) x 2

= 4.32%