Question

1. Calculate the current yield (show work)?

2. What is the "dirty price" when adding accrued interest to the "clean price"?

3. Assuming 182 days in six month period, 365 days per year estimate YTM using iterative method?

4. Draw Cash flow Diagram

Please show work with this homework

Price	170
Coupon%	4
Maturity Date	20 Jan 2019
Yield to Maturity%
Current Yield %
Fitch Ratings:	AAA
Coupon Payment Frequency	Semi-Annual
First Coupon Date	20 Jan 2009
Offering Info
Quanitiy Available	300
Minimum Trade Quanity	150
Dated Date	20 Jan 2009
Settlement Date	15 Feb 2012

Answer 1

1.	The current yield on bond indicates the investment’s annual income divided by its current price. It represents the return you would expect if you held a bond for a year.
	Given
	Bond current price			170
	Coupon rate			4% p.a.
	Since the interest is paid semi-annually, the coupon rate has to be annualized to find the return on investment.
	The annualized rate of interest p.a.			4.04%	( Formula explained below )
	Formula	=	=((1+r/n)^N) - 1
		Where "r" - Simple interest rate
		"n" - Interest payment frequency - Semi annually
		"N" - no.of periods to be compounded to annualize the rate.
	And as there is no information about par value or market price separately, we assume the face value and market price of the bond are same.
	Current yield =		Annual income	* 100%	=	4%
			Market price
2	Clean price - The market price which generally called as "Ex - interest price" and the opposite of the same Dirty price means "Cum interest price".
	Given
	Clean price - 170
	Dirty price as on Settlement date (i.e. 15 February 2012) = Clean price (i.e. as on 20 Jan 2012) + Accrued interest (upto 15th Feb 2012 from 20th Jan 2012)
	Accrued interest		= (170*4.04%*26/365)			=	0.49
	No.of days interest accrued =			11+15	= 26
	Therefore, Dirty price = 170+0.49			=170.49
3.	Calculation of Yield to maturity as on 15 Feb 2012
	Payment Year	Interest amount	Discounted at Current yield @4.04%	The present value of Cashflows
	2013	6.868	0.961	6.60
	2014	6.868	0.924	6.34
	2015	6.868	0.888	6.10
	2016	6.868	0.853	5.86
	2017	6.868	0.820	5.63
	2018	6.868	0.788	5.42
	2019	176.868	0.758	134.04
			Fair Bond price	170.00
	YTM	= C+ (F-P)/n		where C - Coupon payment
		(F+P)/2		F - Face value
				P - Price of the bond
				n - no.of years to maturity
	=	6.868 +(170-170)/7
		(170+170)/2
	YTM =	4.04%
4.	Cashflow diagram of bond from 15 Feb 2012 :
	Note: Cashflows has been shown on annual basis and hence the interest amount also shown as the annualized amount. Cash inflow/ Cash outflow 170 ​ 0 1 2 3 4 5 6 -170 Year of Cashflows