Question

The ABC Corporation had issued 3% coupon (semi-annual), 5-year, AA-rated bonds to finance its business growth. Use both your financial calculator (write the keys and the answer) and show the function you’d use in Excel).

a.     If investors are currently offering $1150, what

is the expected YTM on the investment?

          i.     Is this a premium/discount bond? Describe the

relationship of the YTM, the coupon rate and the price of a bond.

b.     If they were willing to pay no more than $980

for this bond, what would their expected YTM

be?                                              

i.     Is this a premium/discount bond?

c.     Describe the relationship of the YTM, the coupon

rate and the price of a bond.

Answer 1

Solution.>

I have solved it in Excel. The formula used are written in the column along with the values. If you still have any doubt, kindly ask in the comment section.

Part a)

YTM can be calculated by using the Excel Rate function: =RATE(NPER,-PMT,PV,-FV)

This is the semi-annual YTM, Annual YTM = 2 * 0% = 0%

Since the YTM < Coupon Rate, it is selling at a Premium.

Part b)

YTM can be calculated by using the Excel Rate function: =RATE(NPER,-PMT,PV,-FV)

Since the YTM > Coupon Rate, it is selling at a Discount.

Part c)

The Relationship between Price of a bond, Coupon and YTM is:

Price of a bond

Note: Give it a thumbs up if it helps! Thanks in advance!