Question

The table below provides details on three government bonds (annual coupon payment, par value = $100)

Term to maturity (years)	Coupon rate (% pa)	Yield-to-maturity (% pa)
1	9.6	8.52
2	6.0	8.87
3	10.0	8.98

Another 3-year government bond paying a coupon rate of 1% pa (annual coupon payment, par value = $100).

Is the yield of this bond equal to 9%? Why or why not? justify with calculation.

All these bonds are issued by the same government.

Answer 1

Bonds

                A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.

Par value is the amount the lender is repaid when the bond matures.

Coupon rate is the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage.

Yield – to – maturity is the actual return on a bond from the time it is purchased to maturity, assuming that all payments received are reinvested at the same rate as original bonds coupon rate.

YTM = (Face value ÷ Current price of bond) ^ (1 ÷ Periods of bond) – 1

= (100 ÷ 97) ^ (1 ÷ 3) – 1

= 0.0120

=1.02%