Question

e. Your company has an issue of $100 par value annual coupon bonds with 8 years remaining until maturity. The annual coupon rate is 4.10%, along with the current price $92.00 of the bonds. What is the yield to maturity on the bonds?

Answer 1

Answer: Face Value of the Bonds = $100

Remaining years to maturity = 8 years

Annual Coupon rate = 4.1%

Current price = $92

We will use excel to calculate the YTM value

Coupon payment Annually = 4.1% * 100 = $4.1

Now we have to calculate the YTM value so that present value of all the future cash flows comes to 92.

Present value formula = Cash flow/(1+ YTM rate)^(No of years)

We will have to trail and error here to calculate the YTM rate.

Start with 5% as the Bond value is lower than its face value.

On dong this couple of time you will get that at 5.35% rate the Sum of present values comes to around $92. which is our YTM rate

Cash Flow Coupon payment + maturity value in the last year

Year	1	2	3	4	5	6	7	8
Cash Flow	4.1	4.1	4.1	4.1	4.1	4.1	4.1	104.1
Present Value(Cash flow/(1+0.053)^(No of years)	3.891789	3.694152	3.506552	3.328478	3.159448	2.999001	2.846702	68.60794

Sum of all present values = $92.03

Yield to maturity is 5.35% for the given Bond