Question

P&P Corporation has issued 10,000 units of face value bonds that mature in 8 years and pay a coupon rate of 6% paid annually. Calculate the yield if each bond unit is selling at $980.

Answer 1

Answer:
Calculation of Expected rate of return / YTM
Formula =
Cost of debt =	Lower rate +	Price at lower rate - Current price	x (Higher rate - Lower rate)
		Price at lower rate - Price at higher rate
Price=	Present value of Cash inflows
Current price	980.00
Present value at lower rate   =	6%			Present value at higher rate   =	9.00%
Year	Cash Inflows	Present value factor @ 6%	Present value of cash inflows		Year	Cash Inflows	Present value factor @ 9%	Present value of cash inflows
1	60.00	0.94340	56.60		1	60.00	0.91743	55.05
	60.00	0.89000	53.40			60.00	0.84168	50.50
2	60.00	0.83962	50.38		2	60.00	0.77218	46.33
3	60.00	0.79209	47.53		3	60.00	0.70843	42.51
4	60.00	0.74726	44.84		4	60.00	0.64993	39.00
5	60.00	0.70496	42.30		5	60.00	0.59627	35.78
6	60.00	0.66506	39.90		6	60.00	0.54703	32.82
7	60.00	0.62741	37.64		7	60.00	0.50187	30.11
8	1060.00	0.59190	627.41		8	1060.00	0.46043	488.05
		Total	1000.00				Total	820.14
Price at higher rate	1000.00				Price at higher rate	820.14
YTM=	6% +	20.0000	x (9 - 6)%
		179.8574
YTM=	6% +	0.1112	*3%
YTM=	6% +	0.3336%
YTM=	6.33%	(Answer)