Question

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In 2012, Jim Ayers bought five LTV 6s28 bonds for which he paid 88. Three years...

In 2012, Jim Ayers bought five LTV 6s28 bonds for which he paid 88. Three years later, he sold the bonds at 84 and bought five Southern Electric 9 1/2 s 30 bonds at 95. Did he increase or decrease the original rate of yield to maturity, and, if so, by how much? Assume the par value of each bond is $1,000. If required round annual discount amortization to the nearest cent. Round yields to maturity to one decimal place. Enter your answer as a positive value.

Expert Solution

First we need to calculate YTM for both the bonds:

Jim purchased 6s28 purchased at 88 in 2012 and sold it in 2015 at 84.

Face value =$1000

Price of bond when purchased in 2012 = 88; value of bond = 88*1000/100 = 880

Number of years to maturity = 2028 - 2012 = 16 years

Coupon = 6% = 6% * 1000 = 60 (coupon is annually)

By putting these value in excel under RATE formula

RATE=(number of years maturity, periodical payment (coupon), -present value, par value)

= (16,60,-880,1000)

Original YTM at the time of purchase in 2012 =7.30% (for 6s28 bond)

In 2015, Jim sold first bond and then purchased another bond -9 1/2 s 30 at 95

Face value =$1000

Present price of bond = 95; value of bond = 95*1000/100 = 950

Number of years to maturity = 2030 - 2015 = 15 years

Coupon = 9.5% = 9.5% * 1000 = 95 (coupon paid is annually)

By putting these value in excel under RATE formula

RATE=(number of years to maturity, periodical payment (coupon), -present value, par value)

= (15,95,-950,1000)

YTM = 10.16%

Increase in Yield to maturity = 10.16% -7.30%

Increase in Yield to maturity = 2.87%

jeff jeffy answered 1 year ago

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