Question

The quoted ask yield on a 30-year $1,000 par T-bond with a 6.25 percent coupon and a price quote of 106.50 is ___________

Answer 1

Ask yield is the percentage yield on a bond calculated taking investment=ask price of the bond

and return equal to the peodic coupons and face value at the end. Means ask yield is the rate which equals the present value of the coupons and face value of a bond to the ask price of a bond.

Ask price of the bond = Face value * Price quotation of bond/100

=1000*106.5/100

=$1065

To calculate the quoted ask yield, YTM concept can be applied:

Quoted ask Yield=

	Coupon Amount=62.5 Face Value=1000 Net Proceeds=1065 No. of periods=30                                                   =..058434 or 5.8434%

Lower rate shall be 5% and higher rate shall be 6%.

Now calculate NPV at lower rate and higher rate because it shall be used in our interpolation formula given later.

NPV at 5% rate=[1000 *1/(1.05)^{^30}  + 62.5*{(1.05)^{^30}-1/(1.05)^{^30}*.05}]-1065

=[1000*.231377 + 62.5*15.37245]-1065

=[231.3774+960.7782]-1065

=127.15594

In the same way NPV at 6% rate shall be calculated

NPV at 6% rate =-30.5879

Now use interpolation:

	*(Higher Rate-Lower Rate) *(6 -5) =5.8061% Lower rate=5% Higher rate=6% NPV@LR    =127.1556 NPV@HR = -30.5879 NOTE: the rate calculated above is very much similar to that if calculated using excel irr method i.e.5.7884% See: Please do not forget to upvote my solution if you like the same. Feel free to ask any query via comments. Good Luck!