Question

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.

Answer 1

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%