Question

A corporation’s bonds currently sell for $1,200. The bonds have a 5-year maturity, an annual coupon of $90, and a par value of $1,000. What is the current yield of these bonds (to two decimal places, e.g., 5.10%)?

A corporation’s non-callable bonds currently sell for $1,150. The bonds have a 15-year maturity, a 6% annual coupon paid annually, and a par value of $1,000. What is the yield to maturity of these bonds (to two decimal places, e.g., 5.10%)?

A corporation’s bonds currently sell for $1,200 and have a par value of $1,000. The bonds have a 9% annual coupon paid annually and have 10 years to maturity, but can be called in 3 years at $1,100. What is the yield to call (YTC) of these bonds (to two decimal places, e.g., 5.10%)?

Answer 1

Calculation of yield to maturity:

Here C = Coupon / Interest rate

F = Face value

P = Price

n = years of maturity

1. Given that Current market price (P)        = $ 1,200

                     Face value per Bond (F)          = $ 1,000

                       Years of maturity (n)               = 5 years

                       Coupon rate (C)                         = Total annual coupon payment / Face value

= $ 90 / $ 1,000

= 9.00%

Calculation of yield to maturity                            =C+F-PnF+P2

                                                                                                =90+1000-120051000+12002

                                                                        = (90 – 40)/ 1100

                                                                        = 4.5454

                                                                        = 4.55 % (approx)

2. Given that Current market price (P)        = $ 1,150

                     Face value per Bond (F)          = $ 1,000

                       Years of maturity (n)               = 15 years

                       Coupon rate (C)                         = 6% p.a

= 6% on $ 1,000

= $ 60

Calculation of yield to maturity                        =C+F-PnF+P2

                                                                                                =60+1000-1150151000+11��02

                                                                        = (60 – 10)/ 1075

                                                                        = 4.65 (approx)

3. Given that Current market price (P)        = $ 1,200

                     Face value per Bond (F)          = $ 1,000

                       Years to call (n)                          = 3 years

                       Coupon rate (C)                         = 9% p.a

= 9% on $ 1,000

= $ 90

Calculation of yield to call                          

                                                                                    

                                                                     

   = (90 – 66.67)/ 1100

                                                                        = 2.12 (approx)