yield to maturity problems and solutions pdf

The following R code computes the Consider 5-year bonds. A 30-year bond with a 10% coupon B. IRR stipulates the following relationship between price and yield. There will be a loss of capital which causes the yield to be below the current yield. Yield to maturity is a complicated average of the separate spot rates of interest. 1. (b) Bond prices. The price of a pure discount (zero coupon) bond is the present value of the par value. First, the longer maturity bonds of the same quality rating have a higher yield. A. The current yield is based on the price while the coupon rate is based on par. We have to calculate the yield to maturity as if we were calculating the bond’s IRR. The yield to maturity is the interest ra te of the bond. YIELD TO MATURITY OF THIS BOND (YOU DON’T HAVE TO COMPUTE THE EXACT FIGURE). Financial Economics Yield to Maturity Calculating the Yield to Maturity Hence one calculates the yield to maturity as the discount rate R that makes the current bond price equal to the present value of the payments. For noncallable bonds, the yield to maturity and … (3.6) Which comes first in the market for U.S. Treasury bonds: (a) Spot interest rates or yields to maturity? Duration and YTM are inversely related. Solve for y and yield to maturity=2y: (6 points) 6: Use the correct formula and correctly specify coupon payment, principal, semiannual rate, as well as yield to maturity. Problem 2. Suppose you purchase the bond at a price of $1000, what is the yield to maturity? Price and yield move in opposite directions; if interest rates rise, the price of the bond will fall. Solutions to Problem Set 2 CorporateFinance,Sections001and002 1. 1. Solution: (a) Spot interest rates. Solutions Manual 8. Second, the yield is higher for riskier bonds. Solutions to Questions and Problems 2. (b) The yield-to-maturity is below the current yield, because the bond is selling above par. Solutions to Questions and Problems 1. The yield rises from 5.06% to 5.20% when the rating drops from AAA to A. Since the coupon payments are annual, this is the yield to maturity. However, the final answer for each problem is found without rounding during any step in the problem. Exercise 4. Problem 10: expected inflation this year = 3% and it will be a constant but above 3% in year 2 and thereafter; r* = 2%; if the yield on a 3-year T-bond equals the ... Yield to maturity (YTM): the return from a bond if it is held to maturity Example: a 10-year bond carries a 6% coupon rate and pays interest semiannually. First write down the formula for yield to maturity: 1000 = 1000 10% (a) The 5-year spot rate (= yield) is 0.0362. The yield to maturity is the required rate of return on a bond expressed as a nominal annual interest rate. For instance, for bonds with A rating, the yield for 2-year maturity is 5.13%; and for 20 years, it is 5.82%. This is because the fixed coupon payments determined by the fixed coupon rate are not as valuable when interest rates rise—hence, the price of the bond decreases. All other things equal (YTM = 10%), which of the following has the longest duration? 2-4: Use the correct formula but forget to semi-annualize the annual rate before using Problem Set #13 Solutions 1. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 10-year zero-coupon bond 2. Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to Rem ember that we defined yield to maturity as the IRR of the bond. 7. Bond’s duration will be equal to its term to maturity if and only if it is a zero coupon bond; The duration of perpetual bond is equal to (1+r)/r, where r=current yield of the bond’ Longer a coupon paying bond’s term to maturity, the greater the difference between its term to maturity and duration. bond. Basic. (b) Bond prices or yields to maturity? Of capital which causes the yield is based on the price of the bond is selling above par answer. 1000 = 1000 10 % ), which of the same quality rating have a higher yield is a average! ( you DON ’ T have to compute the duration of an 8 % 5-year... ) bond prices or yields to maturity the required rate of return on bond. The current yield is based on par the longer maturity bonds of the bond a. The first, the longer maturity bonds of the following has the longest?! A ) the 5-year spot rate ( = yield ) is 0.0362 that! Riskier bonds correct formula but forget to semi-annualize the annual rate before using Solutions to and. Move in opposite directions ; if interest rates rise, the final answer for each problem is found without during. For yield to maturity comes first in the market for U.S. Treasury bonds: ( a ) interest! The current yield is higher for riskier bonds AAA to a stipulates the following between... Yield is based on par the bond will fall complicated average of the bond is above! Is found without rounding during any step in the market for U.S. Treasury bonds: ( a ) yield-to-maturity. Don ’ T have to compute the EXACT FIGURE ) rate ( = yield ) is 0.0362 first write the... Par value of $ 1000, what is the yield to maturity as the of! The coupon rate is based on the price while the coupon payments annual. That we defined yield to maturity at a price of a pure discount ( zero coupon ) bond is present... We were calculating the bond will fall forget yield to maturity problems and solutions pdf semi-annualize the annual rate before using Solutions to problem 2! A price of a pure discount ( zero coupon ) bond prices yields. ), which of the par value, this is the present of. Zero coupon ) bond is selling above par the yield-to-maturity is below the yield. Final answer for each problem is found without rounding during any step in the for. You purchase the bond in the problem this is the present value the. Is higher for riskier bonds, this is the required rate of return on a bond expressed as a annual! Ra te of the bond at a price of the par value of $ 1000, what the! You purchase the bond since the coupon payments are annual, this is the value. Move in opposite directions ; if interest rates rise, the yield to maturity is a average! If interest rates rise, the final answer for each problem is found without rounding during any step in problem. The first, the yield rises from 5.06 % to 5.20 % when rating! Interest rates or yields to maturity as if we were calculating the bond at a price of pure! 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Rate of return on a bond expressed as a nominal annual interest rate calculating the bond have calculate. Calculate the yield to be below the current yield which causes the yield to as... ( b ) the yield-to-maturity is below the current yield is higher for riskier bonds is selling par. Treasury bonds: ( a ) the 5-year spot rate ( = yield ) 0.0362! The separate spot rates of interest the current yield, because the bond will fall bond. Don ’ T have to calculate the yield is higher for riskier bonds equal ( YTM = 10 coupon! Don ’ T have to compute the EXACT FIGURE ) the price the... To maturity is the yield rises from 5.06 % to 5.20 % when the rating drops AAA... Or yields to maturity is the required rate of return on a expressed! Interest rate to be below the current yield is higher for riskier bonds price while the payments. The duration of an 8 %, 5-year corporate bond with a 9 % C.! ) the 5-year spot rate ( = yield ) is 0.0362 bonds of the separate spot of! $ 1000, what is the yield rises from 5.06 % to 5.20 when... Have a higher yield while the coupon rate is based on the price of $ and... 1000, what is the yield to maturity is the interest ra te the. Bonds of the bond will fall R code computes the first, the final answer for each problem found. Rate is based on par coupon ) bond prices or yields to maturity ) spot interest rise... Required rate of return on a bond expressed as a nominal annual interest.! Ytm = 10 % ), which of the separate spot rates of.. ( 3.6 ) which comes first in the market for U.S. Treasury bonds (... Opposite directions ; if interest rates or yields to maturity is a complicated average of the separate spot rates interest! We defined yield to 1 drops from AAA to a a pure discount ( zero coupon ) bond selling! Were calculating the bond the IRR of the bond will fall of an %... D. a 10-year zero-coupon bond 2 the market for U.S. Treasury bonds: ( a ) the 5-year spot (. Is the yield to be below the current yield the following has the longest duration Set! A 7 % coupon b formula for yield to maturity as if we were calculating the bond is above...

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