In: Finance
A GM and a Ford bond both have 4 years to maturity. GM has a annual coupon rate of 0.061, while Ford has a annual coupon rate of 0.06. Both bonds are semiannual and have a face value of $1000.
a.The GM bond trades at 962.35. What is the yield to maturity (YTM)?
b.What is the price of the Ford bond?
a.Face value= Future value= $1,000
Time= 4 years*2= 8 semi-annual periods
Coupon rate= 0.061/2= 0.0305
Coupon payment= 0.0305*1,000= $30.50
Present value= $962.35
The yield to maturity is calculated by entering the below in the financial calculator:
FV= 1,000
PV= -962.35
N= 8
PMT= 30.50
Press the CPT key and I/Y to calculate the yield to maturity.
The value obtained is 3.60% for a semi-annual period and 3.60%*2= 7.20%. for an annual period.
Therefore, the yield to maturity of the GM bond is 7.20% for a year.
b. Face value= Future value= $1,000
Time= 4 years*2= 8 semi-annual periods
Coupon rate= 0.06/2= 0.03
Coupon payment= 0.03*1,000= $30
The price of the Ford bond is calculated by calculating the present value of the bond.
The present value of the Ford bond is calculated by entering the below in a financial calculator:
FV= 1,000
N= 8
PMT= 30
Press the CPT key and PV to calculate the present value.
The value obtained is 1,240.
Therefore, the value of the Ford bond is $1,240.