In: Finance
A bond's market price is $1,175. It has a $1,000 par value, will mature in 12 years, and has a coupon interest rate of 11 percent annual interest, but makes its interest payments semiannually. What is the bond's yield to maturity? What happens to the bond's yield to maturity if the bond matures in 24 years? What if it matures in 6 years?
Face Value of Bond = $1000
Semi-annual Coupon Payment = $1000*11%*1/2 = $55
No of Coupon payments = 12 years*2 = 24
Current Price = $1175
Calculating the Semi-annual Yield to maturity(YTM) of Bond using the Excel"RATE" function:-
Semi-annual Yield to maturity(YTM) is 4.3149%
Annual Yield to maturity(YTM) = 4.3149%*2
YTM = 8.63%
So, the bond's yield to maturity is 8.63%
b). If the bond matures in 6 years, No of Coupon payments = 6 years*2 = 12
Calculating the Semi-annual Yield to maturity(YTM) of Bond using the Excel"RATE" function:-
Semi-annual Yield to maturity(YTM) is 4.5912%
Annual Yield to maturity(YTM) = 4.5912%*2
YTM = 9.18%
So, the bond's yield to maturity is 9.18%
c). If the bond matures in 24 years, No of Coupon payments = 24 years*2 = 48
Calculating the Semi-annual Yield to maturity(YTM) of Bond using the Excel"RATE" function:-
Semi-annual Yield to maturity(YTM) is 3.6708%
Annual Yield to maturity(YTM) = 3.6708%*2
YTM = 7.34%
So, the bond's yield to maturity is 7.34%