View Full Version : Interest Annually
Leeann10100
Jan 16, 2010, 01:23 PM
Hi I understand the working in excel format but manually I am having problems can anyone put me in the right direction. Thank you.
A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7%.
FV = 1000, PMT = 70, n = 5, I = 10, PV =
A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in 5 years, and is selling today at a $72 discount from par value. The yield to maturity on this bond is __________.
FV = 1000, PMT = 100, n = 5, PV = , I = I am having even more problem with this problem
morgaine300
Jan 22, 2010, 08:51 PM
Still need help on this?
What do you mean by "manually"? You can solve these off sets of charts (tables), using a financial calculator, or using algebraic equations. And I almost don't consider the financial calculator to be "manual". Which were you trying to use?
The concept behind it is still the same. i.e. you still have a FV=1000, etc. The one difference that could come into play is if interest is paid other than annually. But that's not the case. So the real question becomes what is "manually"?
As for the second one, I have no idea how to solve it. The interest rate for an annuity is the one thing I can't do. The algebra is beyond me (I've even asked on here on the math forum), and my calculator just times out on it. If they want you to solve that another way, they most certainly should have taught you how to do it.
I can tell you the PV is 928 (1000 - 72 discount). But that's the PV of the bond face value PLUS the PV of the series of interest payments, and you don't even know what part of that 928 is what. I can set up the equation, but would not be able to solve it.
Leeann10100
Jan 23, 2010, 06:26 AM
sorry mrs morgaine300 what I meant were the algebraic equation, I 've gotten the first answer= $886.28 but the second I have reached as far as (1000 - 72) = 928 and don't know what to do from there.
financequeshelp
Jan 23, 2010, 06:13 PM
For second question:
PMT = 100 n = 5 PV = 1000-72 = 928 (We will use this value as -928) FV = 1000 I =?
I = 12%
In case you need more help email me at
[email protected]
morgaine300
Jan 24, 2010, 02:02 AM
The present value of a lump sum (for the face value):
PV = \frac{FV}{(1+i)^n}
Which is FV=PV(1+i)^n twisted around to solve for PV.
The present value of an annuity (for the series of interest payments):
PV=Pmt\,\left(\frac{1-(1+i)^{-n}}i\right)
You can use that for the first one, where the PV of the face value is 620.92 and the PV of the interest if 265.36. Then added is what you came up with.
The difficulty with the 2nd one is that the present value of the bonds overall is the two above answers added together. Meaning you'd have:
{\frac{FV}{(1+i)^n}}\ +\ {Pmt\,\left(\frac{1-(1+i)^{-n}}i\right)}\ =\ 928
You asked for manual and that's manual. If you can solve that for i, more power to you. My algebra isn't that advanced, and like I said, my calculator times out on it.
morgaine300
Jan 24, 2010, 02:07 AM
financequeshelp, see my post over here:
https://www.askmehelpdesk.com/accounting/journal-entry-purchase-12-bonds-438209.html
Not only are we not here to just do people's homework for them, but you are not "helping" anyone learn by just giving away answers. That isn't going to help on her next test!!
Not to mention that she specifically said she already solved them in Excel (presumably meaning she already knows it's 12%!) and wanted to know the equations. Did you bother to read the posts?
ArcSine
Jan 24, 2010, 07:37 AM
Leeann, Morgaine's right about your second question. Finding the yield-to-maturity is unfortunately a trial-and-error process.
Algebraically, it's equivalent to finding the roots of a 5th-degree polynomial--and if you remember from Algebra, there is no closed-form (or "formula") solution. If you had only two cash flows, say, then you'd be dealing with a quadratic, and then you could solve for i in a 'formulaic' manner. But in YTM cases you're almost always dealing with a lot more than just two flows, so it's back to trial-and-error land.
A manual approach means using Morgaine's formula recursively, using a different guess for the discount rate i each time, until the resulting present value is close enough to the target amount ($928, in this case) to suit you.
That's essentially the process that Excel follows with its "IRR" function--it just has the ability to rip through the iterations a wee bit quicker than you or I could. Ditto for other computer-based solutions, or financial calculators--they just handle the trial-and-error heavy lifting for you in a flash.
Leeann10100
Jan 25, 2010, 03:53 PM
Thank you everyone.